If you're about to retire, you have an important decision to make about your 403(b) or 457 plan. Rolling over your plan balance to an IRA (individual retirement account, or individual retirement arrangement as referred to by the Internal Revenue Service) may give you more flexibility to manage your retirement nest egg.
Why Roll Over?
For many individuals, rolling over the balance into a traditional IRA may be a better option than leaving the balance in your current 403(b) or 457 plan (note: you may not have an option to leave money in the plan. Consult your district for more information).
More investment options. 403(b) and 457 plans generally offer limited investment options. With an IRA, you have access to a greater range of investments, including some that may be more suitable to your goals, timeline and risk tolerance.
Greater flexibility. Some plans allow only lump-sum distributions and others may limit the frequency of withdrawals. If you roll the money into an IRA, you can take it out on your own schedule, provided you are at least age 59 ½.*
More convenience. If you have worked at different jobs during your career and you roll all your previous employers' plan balances into an IRA, you'll have a single, consolidated account to track. This makes it easier to monitor your investments, rebalance as appropriate and schedule required minimum distributions.
Potential estate-planning benefits.With some 403(b) and 457 plans, heirs must take out all the assets after the account holder dies and face a potentially large tax bill. Beneficiaries of IRAs may be able to stretch distributions out over their lifetimes.**
Leave It in the Plan?
There are a couple reasons to consider leaving the money in your current 403(b) or 457 plan rather than rolling it over:
Your age. You can take penalty-free distributions from a 403(b) plan if you leave your job at age 55 or older. And, you can take penalty-free distributions from a 457 plan at any age if you leave your job. With an IRA, you must be age 59 ½ to take penalty-free distributions in most cases. (Note: You can take distributions from an IRA before age 59 ½ if you take them in "substantially equal payments" based on IRS life expectancy tables. You must take these payments for at least five years or until you reach age 59 ½, whichever is later.)
Your investments. If all or part of your balance is in an annuity that would result in substantial surrender fees if you take it out, you may want to consider leaving the money in your current 403(b) or 457 plan.
Roll It Right
Be sure your district transfers your balance directly into an IRA if you choose to roll it over. If the distribution is made to you first, the plan must withhold 20% for federal withholding taxes. Then, you will need to come up with the 20% from other sources to equal the full amount and deposit it in an IRA within 60 days or it will be considered a distribution. In that case, you will be taxed on the entire amount at ordinary income tax rates, and may owe a 10% tax penalty if you are younger than age 55 and have separated from work.
Learn more about IRAs here.
* IRA withdrawals made before age 59 ½, with certain exceptions, are subject to a 10% tax penalty. You are required to start taking distributions from a traditional IRA at age 70 ½ or face a 50% tax penalty on the amount that should have been withdrawn, but wasn't.
** Spouses may roll over inherited IRAs and treat them as their own. Nonspouse beneficiaries are subject to IRS distribution rules for inherited IRAs.
Please note that neither California Teachers Association nor any of its affiliates give tax advice. Consult a tax advisor for information specific to your situation.