Updated for 2019. If you are a doctor or medical professional, you likely have a 403(b) retirement plan. Before switching hospitals, consider the options for your old 403(b). In most situations, a 403(b) rollover to an IRA is the best option. However, you may decide to keep your old 403(b) account where it is. Darrow's retirement advisors break down your options.
403(b) Rollover to IRA
A 403(b) to IRA rollover may be suitable if you:
- Want to continue deferring taxes on your retirement savings
- Seek a greater variety of investment options than is available in your old 403(b) plan
- Want to have your financial advisor incorporate these assets into your investment management strategy
The most common choice for investors is the 403(b) to IRA rollover. In this situation, it is advisable to open a new traditional IRA for the 403(b) funds, even if you already have a traditional IRA account as it may preserve the enhanced creditor protection of the qualified retirement plan. Learn more about this asset protection strategy here.
There are no tax implications or income limitations on 403(b) rollovers. IRAs also typically offer more investment options than employer-sponsored retirement plans and can give you access to professional investment advice from the retirement advisor managing your IRA. In fact, one of the main benefits of a 403(b) rollover is the added flexibility and depth of investment options now available to you.
403(b) Rollover to Roth IRA
Another option for investors is the 403(b) to Roth IRA rollover. A 403(b) to Roth IRA rollover may be suitable if you:
- Want to diversify your retirement planning by utilizing an account that will be exempt from income taxes in retirement
- Have excess cash to pay the income taxes due upon the 403(b) to Roth IRA rollover
- Are unable to make regular contributions to a Roth IRA due to income limitations and wish to do so
Unlike a 403(b) and a traditional IRA, a Roth IRA delays its tax benefit until retirement. When you make withdrawals in retirement, the funds are tax-free so you don’t pay income taxes on your investment gains.
In exchange, the Roth IRA must be funded with after-tax dollars. This means that when you complete the 403(b) rollover, you’ll need to pay income tax on the entire account balance, which can be expensive depending on the size of your 403(b).
Also keep in mind that the amount of your 403(b) rollover that is converted to a Roth IRA will be added to your taxable income for the year and potentially push you into a higher tax bracket. If you cannot come up with the cash to pay the taxes due with non-retirement money, it usually is not advantageous to convert to a Roth.
Unlike a traditional IRA, there are income limitations that apply to regular Roth IRA contributions. However, these income limitations do not apply to a 403(b) rollover to Roth IRA. Therefore, if a Roth IRA makes sense for your overall retirement wealth strategy and a 403(b) rollover to Roth IRA is the only way you can take advantage of it, this might be a good strategy for you.
403(b) Rollover into New 403(b) Employer Plan
Rolling your old 403(b) into your new employer's 403(b) plan may be suitable if you:
- Want to manage everything together
- Are comfortable with the investment options available in your new 403(b)
With a 403(b) plan, your annual contribution limit for 2019 is $19,000. Although your employer can make matching, safe harbor, or profit-sharing contributions, the combined total cannot exceed $56,000. The catch up provision, which applies to individuals over age 50, does not count towards this limit. With the catch up contribution, you can save up to $6,000 more annually in 2019. For this reason, some prefer to have all their retirement funds in one account, as it will likely be growing the fastest given the additional contribution limits.
It is important to note that although this is sometimes the preference for investors, it isn’t always the best choice. Diversification is the best way to manage risk, and holding the bulk of your nest egg in one retirement plan with no discretion on the availability and scope of investment options or the associated plan fees can be taking an unnecessary risk. Further, if you wish to roll over your old plan immediately, you may not yet be familiar with the potential constraints of the new plan.