If you leave your job in education prior to retirement, it may seem tempting to tap your 403(b) or 457 plan account for some quick cash. After all, it’s your money, right?
Just keep in mind that cracking your retirement nest egg is not like making a late-night raid on the refrigerator. You’ll likely feel the financial impact of your decision for years to come.
High Cash-Out Costs
If you cash out early from your 403(b) or 457 plan, know that you won’t receive your full account balance. Your district will immediately withhold 20% of your funds for federal taxes in addition to California state income taxes, and write you a check for the balance.
Additionally, if you leave your job and you’re under the age of 55, you may need to pay an additional 10% federal tax penalty (and a possible state tax penalty) for your early withdrawal from a 403(b) plan. Some exceptions apply, such as in cases of disability (see your tax advisor for details).
Note that, if you leave your job, there is no penalty for early distributions from a 457 plan. Ordinary income taxes will still apply, however.
Yet perhaps the greatest reason not to take a lump sum distribution from your 403(b) or 457 plan is that if you do so, the money will no longer have the potential for tax-deferred growth, an important consideration if your retirement is many years away.
If you’re interested in preserving your retirement savings and plans, consider one of the following options:
- Keep your old plan – As long as you have at least $5,000 in your account, you’ll likely be able to remain within your former employer’s 403(b) or 457 plan. This may be an ideal option if you’re satisfied with your plan’s fund choices, and hesitant to shift your funds elsewhere. In many cases, you may even still be able to borrow from your plan; check with your district for details.
- Transfer your funds to an IRA – You can roll over your 403(b) or 457 plan to either a Roth IRA or traditional IRA, without penalty, as long as you make the transfer within 60 days (if the funds are paid to you) or you request a trustee-to-trustee transfer. If you roll into a Roth IRA, your funds will be considered as income (subject to tax), but going forward, your money may potentially grow tax-free. With a traditional IRA, your money can potentially grow tax-deferred until withdrawn for retirement.
- Transfer to your new employer’s plan – If your new employer offers a 403(b), 457 or 401(k) plan, you may be able to transfer your old plan’s funds to your new plan. Check with your new plan’s administrator for details.
If you have additional questions about your retirement plans options, check our Web site at www.CTAinvest.org. There, you’ll find financial tools and information designed and written specifically for educators.
Note that neither CTA nor any of its affiliates give tax advice. Consult your tax advisor for information specific to your situation.