401k Rollover to 403b: Pros, Cons, and What’s Better

Some investors move from a company with a 401k program to one with a 403b plan. While they are essentially the same in design, they are not the same on the law books, and it is possible that 401k funds may not be transferrable to a 403b.

As for what qualifies or disqualifies a 401k rollover to 403b, it all depends on your employer and plan sponsor. It is important to realize that while the laws allow for a 401k rollover to 403b, it is not required that employers nor account sponsors offer this option.

Most Accept a 401k rollover to 403b


The good news is that very few fund companies will reject rollover funds. Obviously, it is in their best interest to accept the funds, since any new investment accounts mean more assets, more fees, and more earnings for the sponsor. Small asset management firms, however, may decide the process isn’t worth their time investment, and they instead direct these 401k assets to an alternative retirement account.

Choose an IRA instead


While a 401k rollover to 403b is at the discretion of the employer and sponsoring company, an individual retirement account, or IRA, is always available for fund rollovers. Doing so allows 401k proceeds to be pushed into a similar IRA type, thus transferring the balances and keeping your old accounts separate from the new accounts.

It is important to note that a 401k rollover to an IRA should be completed by moving the 401k funds to an IRA with the same tax treatment. Thus, a Roth 401k plan (one that is post-tax) should be rolled into a Roth IRA. Alternatively, a pre-tax 401k account should be rolled into what is known as a traditional IRA. This prevents any changes in tax classification or year-end complications in your income tax reporting.

Keep in mind that $100,000 in a Roth IRA is not the same as $100,000 in a traditional IRA or 401k. Since contributions to a Roth account are not taxed at withdrawal, a retiree with a $100,000 Roth account would have far more funds than a retiree with $100,000 in pre-tax savings. The pre-tax account, of course, would be taxed upon withdrawal.

The Accounts Matter


There are two important considerations that need to be evaluated before deciding to do a 401k to 403b rollover or instead seek out a 401k to IRA rollover. First, a 403b is an account that is tied to your employer. Thus, the available investments may be limited by the management company since you cannot select your 403b provider.

An IRA, however, offers far more flexibility in that an IRA is not tied to an employer, and competition in the industry allows for far more consumer choice in funds and often far lower fees than an employer sponsored 403b. This isn’t always the case, however, and some 403b programs offered by government employers afford extra investment alternatives, such as a pension program or specialty retirement fund. Teachers’ pensions afforded by the state governments are a perfect example of such investment products.
Tim Ord
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