Long story short, I left my last job at a University in April 2013. Being a not-for-profit, I had a 403(b), not a 401(k).
I started my new job in May, and was eligible for their 401(k) starting this January, and am currently enrolled in it.
I did not roll-over my 403(b) into it when I signed up, because I wasn’t sure if I should. But right now, all it’s doing is getting some interest (a pretty good amount, to be told…I had it for 3.5 years, and it’s averaged over 10%.)
But ideally, it should be in an account I can keep putting money into, right? So, near as I can tell, these are my options:
leave it as is to just collect interest.
Roll over into my employer’s current 401(k).
Transfer it into a new personal retirement account, either a traditional or Roth IRA.
Cash it out and do something else with it, knowing that I’d take a huge penalty.
That last option is certainly the lousiest, so really I guess I’m asking if it’s best to leave it, put it in my current account, or make a new account with it.
If you have any really high interest debt that’s eating away at you, and you can be disciplined enough to actually use the 403b on that debt by cashing it out early, then it might be the best way to spend it (it really depends on the percentages). The “penalty” is just that you’ll pay full taxes on it as if it were income, and it might be charged at a higher marginal rate at that depending on what your annual salary is right now (almost certainly will be if it’s sizeable). When you cash out, they will just automatically take 30% and give it to the IRS. If that ends up being too much, you’ll get some of it refunded when you file your taxes next year.
That’s what I did with my old 403b. I cashed it out and then threw it at some high interest credit card debt I had.
If you are high-interest debt free, I would say roll it over. It’ll take a bit of finagling but you should be able to do it. As far as whether it’s better to put it into your 401K or a new IRA, I can’t make that specific recommendation, and would be interested in hearing more about that.
I rolled over my old 401(k) accounts into a rollover IRA at Vanguard. This gives me more flexibility than moving the money to the new employer’s 401(k).
YMMV but when I decided to switch my retirement strategy to low-fee funds, I found that my long ignored 403b allowed me get fees lower than Fidelity or Vanguard. It also has some unique investment opportunities that I now am very happy to have.
It did at least as well as my 401k, so I lost little by keeping it active. In fact, having it was what allowed me to eventually open a rollover account for other funds.
The penalty for early withdrawal from a 403(b) (or 401(k)) is 10%, in addition to the income tax. Plus you lose the tax-deferral on gains for the rest of the years between the withdrawal and retirement. It is almost never a good idea to take money out of a tax-deferred retirement account before retirement.
To the OP: leave it or roll it over into a Rollover IRA at a discount brokerage like Vanguard or Fidelity. You can invest it in whatever you like from within the Rollover IRA, in particular, low fee index funds (or index ETFs) will give you the best chance at long term returns.
BTW, if you’ve had 10% gains in your 403(b), you’re not getting interest. That’s almost certainly gains from a mix of equity investments and more conservative cash/bond funds (or you’re invested in extremely high-fee and risky funds, since the S&P went up about 30% last year).
You can leave it in the existing 403(b) if the investment choices are good, low fee (much less than 1% for index funds, no more than 1% for actively managed ones).
Rolling it into a Roth would be ok if your marginal tax rate is low, and you feel like you can take the tax hit in order to secure the tax-free gains. Again, you’d want to pick a Roth IRA brokerage account at a discount brokerage so you could invest in anything.
I’d avoid putting it into your current 401(k). There’s little advantage to that, typically.
As for my portfolio, it’s about 60% equities (equity index, global equities, and growth,) 5% real estate, 25% fixed income (Bond and inflation-linked bond,), and 10% “guaranteed” through TIAA traditional.
I’ll look into something from Vanguard or Fidelity. I can certainly just leave it and let it grow, but there’s no reason not to put it into something I can keep investing money in, right?
If you use a Rollover IRA, you probably can’t add money to it, except for rollovers from other 401/403-type employer sponsored retirement plans (and only after to leave those employers). I’ve got one that has rollovers from at least three different jobs. The advantage of a Rollover IRA is that you may, in the future, roll it over again into another company plan (if, for example, that plan had irresistibly better options).
If you want to be able to add money to it, I’m pretty sure you can roll over into a Traditional IRA. You lose the ability to return the money to an employer plan, but you can add pre-tax contributions, if you’re eligible.
Ask the brokerage for details on eligibility and the distinctions between the different types of accounts. Either way, you should be able to invest in anything you like within those accounts.
You don’t need to add money to the 401(b) rollover though. Keep it separate, because as RickG notes if you add your own IRA money to it you then lose the ability to roll it into another employer-sponsored plan in the future.
You can always put your own money into a separate IRA account at the same brokerage. As another poster notes, they’re lumped together for things like figuring out total account balances (may affect trading fees etc.).
As far as “but ideally, it should be in an account I can keep putting money into, right?” - well, no, not really. I mean, aside from the commingling of funds keeping you from being able to roll it into another employer’s plan, there’s no harm in having it in a regular IRA and adding to that. But simply leaving it at the former employer’s plan isn’t necessarily the worst thing in the world.
Consider your investment options there, and whether you’re happier with them or with the options with the new employer, or whether you want to have it at Fidelity or Vanguard or whatever, where you have complete control over your investment choices.
Honestly the only absolutely wrong choice would be to cash it out. There are rare situations where that would be the better choice, but those are very rare indeed what with the taxes and penalties.
Something else nobody has mentioned, but might be worth considering: I stumbled across cites noting that if you ever declare bankruptcy or are sued, money in 401(k) and similar plans is protected - but money in IRAs might not be.
The laws vary by state, and IRA money that is exclusively from an employer-plan rollover may well be excluded (or it may not). and from what I can tell even states where the IRA is at risk wouldn’t allow the creditors to seize the whole value, but still… if you’re planning on going bankrupt or getting sued for 10 million dollars, keep the money in an employer-sponsored plan ;).
I’m in the same situation with a 403(b) from a job at a University. it’s a mix of TIAA and Fidelity
Eventually I’d like to move it into my stock investments. I need to talk with my adviser at Wells Fargo and see when I can do that. Not sure if I have to wait until I’m 65 or not. I’m not even 50 yet so it may be a long, long wait.
If the 401(k) plan is managed by, say, Fidelity (as opposed to simply having Fidelity funds in the mix), you may be able to do the rollover “in kind” to a Rollover IRA with them. I did that for one of my rollovers a number of years ago. That meant that I could keep the investments in the original mutual funds. Since a couple of the funds were closed to new investors, I would not have been able to recreate the particular mix in the rollover account.
You obviously won’t be able to do this if the employer account is managed by an insurance company or the like.
I’m sure Wells Fargo has Rollover accounts. I’d imagine they’d be like any other brokerage tax-deferred accounts, where you can invest in most equities or mutual funds. Don’t know what their fee structure is like, but discount brokerages can save you a lot of money over traditional broker/advisers, if you can get away without their advice.
This is a good point. When you do a rollover, what happens is the former manager basically sells everything, and sends a check or wire transfer to the new manager, where you have to reinvest everything from scratch. You just have to hope the market doesn’t plummet right before the sell, and zoom back up during the intervening period :).
Interesting point about if it’s to remain with the same brokerage - that hasn’t been an option with either of the rollovers we’ve done.
If you are fortunate enough to be in a 403(b), under no circumstances get out of it – there are so many advantages to it, nothing else comes close . . .
IRS realized their mistake in allowing the 403(b), and that’s why it was stopped after a few years, with no new enrollment, at least that’s what I was told . . .
If you are in mixed TIAA/CREF stuff, now is the time to be heavy on CREF, and about 5 years before you annuitize everything, put as much as possible into TIAA . . .
I’ve been retired over 22 years, and my TIAA (with survivor option) pays me FAR more than my salary at retirement . . . .
I started to work for a non-profit company in late 2012 and enrolled in their existing 403(b) plan. I’ve never heard the idea that the IRS “stopped allowing the 403(b).”
Yep, new 403(b)'s still can be created. I opened a new 403(b) Group Supplemental Retirement Account just last year. This was 38 years after opening my TIAA RA.
The options available to me were far superior to either VG or Fido.
While I like the investment options for my IRA vs every 401k-type program I’ve had, there is another thing to consider if deciding to roll over to a trad IRA vs a 401k. If you’re ever over the income limit to contribute to an Roth IRA, you might want to take advantage of the trad to Roth rollover loophole, that lets you contribute after-tax to a trad IRA (note that usually you would want this account for pre-tax contribution) and convert it to a Roth. If you have any pre-tax money in trad IRA accounts, that transfer is complicated. My understanding is that the forms pool all trad IRA funds for tax purposes, so you can’t just transfer the after-tax money and leave the pre-tax money. I’ve never actually done this, so I’d appreciate if someone could chime in.
Upon reading this post on preview, that’s one convoluted paragraph. My apologies.
Here you go. What you described is a Backdoor Roth. Only needed when you hit the income limits for a regular Roth contribution and requires that you have no funds in a regular IRA.