What Happens to My 403b When I Retire?

A 403(b) plan is a retirement savings vehicle for employees of public schools and certain tax-exempt organizations. Contributions are often made directly from paychecks. Funds typically grow on a tax-deferred basis, meaning taxes are not paid on contributions or investment earnings until money is withdrawn in retirement. Some plans also offer a Roth 403(b) option, where after-tax contributions allow for tax-free withdrawals in retirement if certain conditions are met.

Navigating Your 403(b) Retirement Options

Upon retirement, individuals with a 403(b) plan have choices for their accumulated funds. One option is to leave the funds within the existing 403(b) plan. This can be advantageous if the plan offers good investment options, competitive fees, or specific rules that make it beneficial to remain. However, access to funds might be limited, and ongoing administrative fees could apply.

Another strategy is to roll over 403(b) funds into another retirement account. A direct rollover involves the plan administrator transferring funds directly to a new account, such as an Individual Retirement Account (IRA) or a qualified retirement plan with a new employer (e.g., a 401(k) or another 403(b)). This approach maintains the tax-deferred status of traditional 403(b) funds and can offer greater investment flexibility and potentially lower fees. Consolidating multiple retirement accounts into a single IRA can also simplify financial management.

Alternatively, retirees can take distributions directly from their 403(b) plan. This provides immediate access to funds and can be structured in various ways. Options include a lump-sum withdrawal of the entire account balance. Retirees might also opt for periodic payments, receiving regular installments over a specified period or their lifetime. Some 403(b) plans may also offer annuitization, converting the account balance into a guaranteed stream of income for life or a set number of years.

Implementing Your Chosen 403(b) Strategy

Once you determine your 403(b) retirement strategy, the next step is implementation. If you decide to roll over your funds, a direct rollover is recommended to avoid potential tax complications. This process begins by opening a new IRA or confirming your new employer’s retirement plan accepts rollovers. You then contact your 403(b) plan administrator to initiate the transfer, providing the new account details. Funds are moved directly from your old plan to the new one without you physically handling the money.

In contrast, an indirect rollover involves the 403(b) plan administrator sending the funds directly to you, usually as a check. If you choose this method, you have a 60-day window from the date you receive the funds to deposit them into a new qualified retirement account. This avoids taxes and potential penalties. If funds are not redeposited within this timeframe, they may be considered a taxable distribution and subject to a 20% mandatory federal income tax withholding.

For individuals choosing to take distributions, contact the 403(b) plan administrator to request a withdrawal. You will need to complete a distribution request form, specifying the type of distribution (e.g., lump sum, periodic payments) and the desired frequency or amount. The administrator will provide information on required documentation and any necessary identification or verification steps. If you decide to leave your funds in the existing plan, you do not need to take specific action beyond ensuring your contact information and beneficiary designations are current.

Understanding Tax Implications and Required Minimum Distributions

Distributions from a traditional 403(b) are taxed as ordinary income in the year they are received, added to your other income and taxed at your marginal rate. If funds are accessed before age 59½, they may also be subject to an additional 10% early withdrawal penalty. Exceptions apply, such as separation from service at age 55 or later, disability, or certain medical expenses.

For Roth 403(b) accounts, qualified distributions are entirely tax-free and penalty-free. To be qualified, distributions must occur after the account has been open for at least five years and after the account holder reaches age 59½, becomes disabled, or dies. If a Roth distribution is not qualified, the earnings portion may be subject to ordinary income tax and the 10% early withdrawal penalty. However, contributions can typically be withdrawn tax and penalty-free.

Direct rollovers of traditional 403(b) funds into another traditional tax-advantaged account, like a traditional IRA or 401(k), are not taxable events at the time of transfer. This allows your retirement savings to continue growing on a tax-deferred basis. However, if you roll over traditional 403(b) funds into a Roth IRA, this is treated as a Roth conversion, and the entire amount rolled over is subject to ordinary income tax in the year of the conversion.

Required Minimum Distributions (RMDs) are mandatory annual withdrawals from traditional retirement accounts, including 403(b)s, that begin once the account holder reaches a certain age. Under the SECURE 2.0 Act, the age for beginning RMDs increased to 73 for individuals born between 1951 and 1959, and will further increase to 75 for those born in 1960 or later. RMDs ensure taxes are eventually paid on tax-deferred savings; failure to take the full RMD by the deadline can result in an excise tax of 25% on the amount not withdrawn, reducible to 10% if corrected within two years. Roth 403(b) accounts are exempt from RMDs during the original owner’s lifetime, similar to Roth IRAs.

Planning for Your 403(b) Beneficiaries

Designating beneficiaries for your 403(b) account ensures your assets are distributed according to your wishes. These designations typically bypass the probate process, allowing a more direct transfer of funds to your chosen heirs. Beneficiary designations on your 403(b) account generally supersede instructions in your will.

Spousal beneficiaries often have the most flexible options upon inheriting a 403(b) account. A surviving spouse may roll the inherited funds into their own IRA or other qualified retirement plan, effectively treating the account as their own and delaying RMDs until their own required beginning date. They can also establish an inherited IRA or take a lump-sum distribution.

Non-spousal beneficiaries typically face different rules, especially for deaths occurring after 2019 due to the SECURE Act. Most non-spousal beneficiaries are subject to the “10-year rule,” which requires the entire inherited account to be distributed by the end of the tenth calendar year following the original account holder’s death. Certain “eligible designated beneficiaries,” such as minor children, disabled individuals, or those not more than 10 years younger than the original owner, may have more flexible distribution options. Regularly reviewing and updating your beneficiary designations, particularly after significant life events, helps ensure your wishes are accurately reflected.