By Stacey Ritzen, WCI Contributor
When starting a new job, it makes sense that you’d want to roll your retirement account into your new employer's plan. After all, it’s easier to manage your funds in one account than in multiple accounts, and you can avoid having to pay additional maintenance fees and/or expense ratios to manage just one account. For most people who have employer-sponsored 401(k) accounts, this is a relatively easy and straightforward process. But things get a little bit more complicated when dealing with 403(b) and 457(b) retirement accounts, and you may be wondering if it’s a good idea to roll a 403(b) into a 457(b) (or even if you can).
Here's what you need to know.
What’s the Difference Between a 403(b) and a 457(b)?
The most significant difference between a 403(b) and a 457(b) is that a 403(b) is your money and money in a 457(b) still technically belongs to your employer. It is deferred compensation. That doesn't matter so much in a governmental 457(b), since the money is held in trust for you, but with a non-governmental 457(b), it's possible you could lose that money to your employer's creditors if your employer goes bankrupt (here at the WCI, we're still trying to find a doctor who has lost 457(b) money that way).
Another big difference between the two different retirement accounts is that nonprofits, including public schools and some ministries, offer a 403(b). A 457(b), while also eligible to nonprofit employees, is primarily offered by state and local government institutions. In some instances, nonprofits may even offer both 403(b) and 457(b) plans.
In both occurrences, 403(b) and 457(b) plans are funded by tax-deferred dollars, and income tax is paid at the time of withdrawal. But while a 403(b) pays out similarly to a traditional 401(k) plan—in that withdrawals can be made penalty-free once you reach 59 1/2—457(b) withdrawals differ slightly.
Withdrawing funds from a 457(b) is complicated and difficult while still employed with the plan sponsor. However, once you switch jobs, you can access your money anytime, at any age, without getting dinged with the 10% early withdrawal penalty. That's how a governmental 457(b) works, anyway. But there are disadvantages when it comes to some non-governmental plans that have relatively poor distribution options—such as requiring you to withdraw the entire 457(b) balance in the year you leave the employer, which can result in withdrawals being taxed at the same or an even higher tax rate than you had at the time of contribution.
Another difference between 403(b) and 457(b) accounts is contribution caps. In 2023, 403(b) accounts allow for total contributions of $66,000, including $22,500 from the employee, but 457(b) accounts are capped at $22,500 regardless of whether the employers or employees make the contributions.
And while both plans allow for catch-up contributions, 403(b)s grant an additional $15,000 over five years if you’ve worked for the same employer for at least 15 years. Meanwhile, 457(b)s give you three years leading up to the retirement age to double your annual contribution limits—just as long as you haven’t already maxed out your contribution.
More information here:
Comparing 14 Types of Retirement Accounts
Is It Possible to Roll a 403(b) into a 457(b)?
Knowing the differences between 403(b) and 457(b) plans is fundamental to understanding whether you can roll the former account into the latter. In a word, yes, it is possible—as you can see from this handy rollover chart provided by the IRS. It essentially says that you indeed can roll a 403(b) over into a GOVERNMENTAL 457(b). However, the early withdrawal capabilities of the 457(b) present a unique challenge to those wanting to roll over a 403(b) into their new account.
In other words, just because you roll a 403(b) into a 457(b) doesn’t mean that you can access those funds penalty-free before retirement age. Instead, 457(b) plans require separate accounts within your account for rollovers from 403(b) accounts. While all of your money will be managed by the 457(b), the funds from the 403(b) will be held separately and, as such, will still be subject to the 10% early withdrawal penalty.
However, once you leave the employer that sponsors your 457(b) plan, you can access those funds as you like.
Other options are to roll that 403(b) into a traditional IRA (beware that could cause pro-rata issues if you do the Backdoor Roth IRA process each year), to roll it into a solo 401(k) if you have one or if you qualify to open one, to convert it to a Roth IRA (yes, there will be a tax bill) or to simply cash it out (tax bill plus a 10% penalty). Your new employer may also offer a 403(b) or 401(k), which is usually a better place to roll 403(b) money into than a 457(b).
More information here:
The 2023 Retirement Plan Contribution Limits
How Do I Roll Over My 403(b)?
Once you’re no longer employed at the job that you held your 403(b) account with, you will become eligible to roll over your account into your 457(b). Your current plan administrator should be able to help you with this. Just make sure that you have an account statement for the 403(b) that you want to roll to your 457(b) account, with your account number, balances, and the contact information for your former plan administrator.
You may need to fill out a basic form that your current plan administrator will process and send to your previous employer. It’s as easy as that!
If you need extra help with planning for retirement or have
questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.
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