Can You Roll A 401k Into A 403b In 2024

401k (for-profit) and 403b (non-profit) can be rolled over into each other, following specific conditions. The most important one is eligibility. It requires a fair understanding and careful planning to ensure that your money is transferred smoothly without additional taxes or penalties.

There are two types of rollover: direct and indirect. It is always recommended to use direct rollover. We will discuss it in detail later on.

Here are a few things to consider while rolling your 401k to 403b. Before switching your job, you must check if your plan accepts rollovers from other retirement plans. You will have to discuss this with a potential employer.

How Can You Roll A 401k To 403b? 

The foremost thing to roll over your 401k to 403b is eligibility. If you move funds from 401k to 403b, you are already employed in an organization under IRC Section 501(c)(3) of the IRS.

To be eligible for 403b, one should be working in a non-profit organization, which can be an educational institute, religious institute, or hospital. Moreover, check if your employer accepts rollovers from 401k. Some employers accept rollovers from other retirement accounts, while others don’t. 

An IRA is always an option if you cannot roll over from 401k to 403b. Explore various individual retirement accounts and transfer 401k funds to IRA, which is very similar to rollover 403b to IRA.

Direct and Indirect Rollovers

There are direct and indirect rollover options. The direct rollover is a trustee-to-trustee transfer, which involves transferring money directly from your old retirement account to the new one. This rollover has no risk of additional taxes or penalties.

 An indirect rollover allows you to receive funds and deposit them into your new plan personally. The period to avoid additional taxes and penalties is 60 days.

Indirect rollover is beneficial if you need cash. If you’ve not deposited the amount within 60 days, it will be considered an early withdrawal, and you must pay the taxes. This early withdrawal is also subjected to penalties. 

Usually, the previous plan administrator withholds 20% of the total amount for indirect rollover. The reason is to pay taxes and penalties in case of failure to rollover funds.

Do The Paperwork

Before transferring your 401k to 403b, do the necessary documentation. Talk with the administrators of both plans and see if they are allowing you to do so, as there are always some exceptions. You need to fill out the rollover forms provided by the administrators of both plans. 

First, you’ll need a 401k rollover form, which your current employer’s HR department will provide. Provide all the details of your 403b account and request a direct rollover from your 401k to 403b.

The second form would be a 403b rollover acceptance form, which your 403b plan administrator will provide. This form is required to ensure the 403b plan can accept rollover funds.

Submit these forms to both financial administrators, and they will transfer the funds directly to your 403b account. The documentation is crucial; the forms are sometimes over 100 pages long. Therefore, it is recommended that you consult a financial advisor who can either fill out these forms for you or help you. This way, you will have a smooth rollover experience.

Look For The Internal Expenses

You need to look at the plan document to determine its investment options and internal expenses. Opt for the option/plan administrator that costs you less, so you don’t have to compromise your savings. The rollover generally doesn’t cost anything, but it depends on various factors. An estimated breakdown of costs is listed below:

• Transfer Fees range from $25 to $75 for processing the rollover.
• Exit Fees range from $50 to $100 and are charged by your 401k plan advisor.
• Investment Fees apply when you need to dissolve certain investments, ranging from 0.5% to 2% of the investment value.
• The financial advisor charges an Advisor Fee for assisting you throughout the rollover process. Depending on their fee structure, it ranges from $200 to $500.

Pros and Cons of 401k and 403b

401k and 403b share the common advantages and disadvantages. Let’s compare 401(k) and 403(b) and discuss details like tax-advantages and employer match. 

Tax Advantage

Both of these plans are pre-tax accounts. The money contributed to these accounts is generally withdrawn from the employee’s paychecks before taxes, which benefits them by paying less taxes that year. The money then grows (you haven’t paid taxes on it, so more) until you withdraw it during retirement. 

During withdrawal, you will pay taxes, but you can decide how much taxes you want to pay based on the amount you withdraw.

Employer Match

Employer match means a contribution to your retirement account from the employer based on an agreed percentage. This practice is more common in high rank positions of for-profit companies, i.e., in 401(k). On the other hand, 403(b), it is rare to have an employer match.

Most employers agree to invest up to a certain percentage of your salary based on your contribution to the plan. 

Let’s say you earn an $80,000 annual salary, and your employer offers a 50% match on your contributions up to 6% of your salary. Here’s how the employer match would work:

Employee Contribution:

You contribute 6% of your salary to your 401(k) or 403(b) plan.
6% of $80,000 = $4,800 (this is what you contribute for the year).

Employer Contribution:

The employer offers a 50% match up to 6%. So, for 6% of your salary, your employer will contribute 50 percent.

Since your contribution was $4,800, 50% of $4,800 = $2,400
The employer will contribute $2,400 max per year.

Although, employer matches seem lucrative for extra money, they come with conditions. This is commonly called a vesting (ownership of employer’s contribution). Cliff vesting (100% ownership after a certain number of years) and graded vesting (gradual ownership) are the most common.

The main disadvantages of 401k and 403b are early withdrawal penalties and tax implications. 

Contribution Limits

While both the plans give you tax advantages, the government has enforced some contribution limits. This restricts the amount of money you want to save per year. This limit is $22,500 for 2023, and for 2024, this limit is increased to $23,000.

If you are 50 or older, you’re eligible for catchup contributions of up to $7,500 annually.

While both plans have the same contribution limits, 403b plans have additional options. If you work in a 403b organization for up to 15 years, you can make a catch-up contribution of $3,000 annually for up to five years.

Early Withdrawal & Penalties

There is an age limit for the withdrawal of money for both the plans, as these are intended to be used for retirement savings. You can not withdraw from your 401k or 403b accounts before 59½. If any account holder withdraws from their accounts before the above-mentioned age, they will be subjected to additional taxes and an early withdrawal penalty. 

Of course, there are exceptions for emergencies related to medical, health, and educational expenses. In some cases, first-time home purchases are also considered exceptions.

Differences Between 401k and 403b

The main difference between these plans is whom they are offered to. 401k is offered to the employees of the private sector, while 403b is offered to the employees of the public sector, which comes under IRC 501(c)(3).

The second main difference is the type of investments. 401k offers various investment choices, allowing them to invest in mutual or exchange-traded funds. Some 410k accounts also allow employees to invest in individual stocks and bonds. On the other hand, 403b allows a limited number of investment options, allowing to invest in annuities and mutual funds only.

What If the Plan Administrator Does Not Accept Rollover?

Suppose the plan administrator does not allow the rollover of funds from the previous 401k to the current 403b. You can transfer old 401k funds to an IRA. It has diverse investment choices compared to 403(b), too.

Conclusion

Rolling over your 401k to 403b is a simple task. All you need is the necessary paperwork and follow the IRS guidelines regarding rollover. A financial advisor will ensure the process is done smoothly and without penalties.

Frequently Asked Questions