When you’re cleaning out your classroom and packing up boxes for a career change, new district or retirement, remember to pack up your 403(b) savings as well.
Making a transition from job to job – no matter the reason – can be a frenzied process. Sometimes the last thing you want to worry about is what to do with the money in your plan. But taking educated steps can ensure that your retirement money remains in your control.
You can transfer the funds into an approved retirement account or “cash out” and take a lump sum payment. Taking the cash can be tempting, but also very costly. You’ll actually receive only a portion of your balance, because you’ll owe taxes at rates as high as 35% and you may have to pay a 10% penalty if you’re younger than age 55. Despite the penalties, 45% of Americans withdraw the money from their voluntary retirement accounts early, according to a 2005 study by Hewitt Associates.* Only 23% of those surveyed roll the money into an individual retirement account (IRA) or other qualified retirement plan.
Roll Over for Growth
You may want to think about keeping your investment options open – allowing your money to grow into a comfortable retirement nest egg by initiating a direct or standard rollover into your new employer's 403(b) plan (if it accepts rollovers) or a new IRA. This will allow your money to continue growing tax-deferred.** For a direct rollover, your plan’s distribution check may, at your employer’s discretion, be given to you or sent directly to the trustee of your new IRA or plan. In either case, the rollover check must be made payable to the trustee.
In a standard rollover, the check is made payable to you and you make your own arrangements to roll over the funds into an IRA or other plan within 60 days of receiving the check. The drawback to this type of rollover is that your former employer is required by law to withhold 20% of your distribution for federal income taxes. To avoid a taxable distribution, you’ll have to come up with that amount from another source in order to complete the rollover within the 60-day period.
Reap Retirement Rewards
If you are moving to another district, be sure to review the 403(b) vendor options available in your new plan before rolling over your old plan. If you are leaving your job and want to roll your 403(b) plan assets into an IRA, contact your district for the appropriate forms.
* Source: “Hewitt Study Shows Half of U.S. Workers Cash Out of 401(k) Plans When Leaving Jobs,” Hewitt Associates, July 25, 2005.
** Withdrawals in retirement will be taxed as ordinary income. Early withdrawals may be subject to a 10% IRS penalty.