How to transfer from 401k to 403b?

Once you land a new job with another employer, you should decide what to do with your 401(k) savings. While you may have the option to leave the retirement savings with your former employer, rolling over the 401(k) to the new employer’s plan may be a better option. If you are moving from a for-profit to a non-profit organization, you can consider transferring 401(k) into 403(b).

You can roll over your 401(k) plan to a 403(b) plan either through direct or indirect rollover. If you choose the direct rollover option, the 401(k) plan administrator will transfer the money directly to your 403(b) plan. With an indirect rollover, the 401(k) balance will be sent to you first, and you must deposit the money into the 403(b) plan within 60 days. If you have not deposited the money within 60 days, it will be deemed an early withdrawal, and you will pay income taxes and a potential tax penalty.

Can you leave 401(k) with your former employer?

Most 401(k) plans allow participants to keep their retirement savings in the plan when they leave their job or retire. If your employer allows you to leave your 401(k) money behind, the money will continue growing tax-deferred, but you won't be able to make additional contributions to the plan or borrow against your retirement savings.

However, if you are 55 or older when you leave your job, you may be allowed to take penalty-free withdrawals from the 401(k) plan. You will still be required to pay income taxes on the withdrawals. Also, once you reach age 73, you must start taking the required minimum distributions (RMDs).

Additionally, you may only be allowed to leave your 401(k) plan if your balance is at least $5,000. If you have less than $5,000 (but at least $1,000) in the 401(k) plan, the plan administrator will transfer the plan balance to an IRA of its choice. If your balance is below $1,000, the plan administrator will force cash out and send you a check with your balance.

How to transfer 401(k) to 403(b)

Follow these steps to transfer a 401(k) plan to a 403(b) plan:

Check if your plan accepts rollovers

If your new employer offers a 403(b) plan, you must first check if they allow rollovers from previous employers. If the employer accepts rollovers, you can transfer the retirement money directly to the new plan custodian. However, if the new employer does not allow rollovers from previous employers, you can decide to roll over the 401(k) to an IRA to enjoy a wider pool of investment options and greater flexibility.

Review the new employer’s plan

Before rolling over your 401(k) money to the new employer's plan, ensure you are familiar with the plan's fees and investment options. Check the new plan documents to know how much fees you will pay; you should lower fees where possible since they can reduce your investment earnings. Also, check the investment options available in the plan to ensure they fit into your overall retirement strategy. You may want a plan with a diversified portfolio of funds with the lowest fees.

Begin the rollover process

When rolling over your 401(k) money, you will need to fill out paperwork from both plan administrators. You may have several options to transfer the money to the new plan.

If you choose a direct rollover, the retirement money will be transferred directly from your 401(k) to your new plan without getting into contact with the money. The 401(k) administrator may send the money via paper check or wire transfer to the new retirement account.

If you opt for an indirect rollover, the money will be sent to you and you must deposit the money in the new account within 60 days. However, an indirect rollover can trigger a 20% withholding tax on the amount transferred.

Tax implications of rolling over 401(k) to 403(b)

Contributions to a 401(k) and 403(b) plan are made with pre-tax dollars, and you won’t pay income taxes when you contribute to the plan. Hence, when you roll over a 401(k) to a 403(b), you won't pay income taxes on the transaction. However, if you roll over 401(k) to a Roth 403(b) plan, the funds will be subject to income taxes since the Roth account is funded with after-tax dollars.

If you choose a direct rollover, you won’t be required to report the transfer on your tax return. However, if you opt for an indirect rollover, you will need to report it on your tax return using Form 1040. You must report the rollover as a non-taxable distribution and indicate “rollover” next to it.

Other options for an old 401(k)

If 401(k) makes up a big chunk of your retirement savings, you should weigh the options that you have and choose the option that makes sense to you. Apart from rolling over to the new employer’s plan, here are the other options you have:

Leave 401(k) with former employer

If you like your former employer's investment options and you pay low fees on your investments, you can decide to keep your old 401(k) with your former employer. You should have at least $5,000 in your retirement account for your employer to continue holding your old 401(k), and the money will continue to grow tax-deferred. You will also enjoy protection against creditors during a bankruptcy or lawsuit. However, you should actively monitor the performance of your investments and any significant changes to the plan.

Rollover the money into an IRA

When you leave your job, you can choose to roll over the 401(k) into an IRA. An IRA offers a broader range of investment options than are provided in your employer's plan, and it may also have low fees on investments. If you don't have an IRA, you can set up an account with a brokerage, and ensure they accept the kinds of rollover you want to make.

You won't owe income taxes when you roll over from a 401(k) to a traditional IRA. However, if you roll over 401(k) to a Roth IRA, you will pay income taxes and an additional penalty tax if you are below 59 ½. 

Cash out

If you need cash immediately, you can decide to cash out the 401(k) and take the money. You can use the money to pay your living expenses or to purchase an asset such as a home. However, if you are below 59 ½, you could pay a 10% penalty for early withdrawal on top of income taxes. If you are age 55 or older when you cash out, you won’t owe the early withdrawal penalty.