Following the pandemic, there has been an uptick in teachers leaving the education industry. Whether you’re looking for a higher salary, better work-life balance or more comprehensive benefits, there are a lot of benefits to making a career change if you’re unhappy in your current role.
Still, the education sector works a bit differently from other industries, so there are steps you should take to ensure your financial security is protected. For instance, many people working in public education or for a tax-exempt organization might have a 403(b) retirement plan as opposed to the more common 401(k) or IRA plans.
If you quit education, make sure you take the proper steps to protect that money and carry it over into your future retirement funds.
What Is a 403(b) and How Does It Work?
A 403(b) is a type of tax-deferred retirement plan that works similarly to a 401(k). Available exclusively to educators, charities and other nonprofit-sector employees, the plan allows you to save a set amount from each paycheck for retirement.
While 403(b)s are similar to 401(k)s or IRAs, there are a few key differences. For instance, 403(b) plans are specifically designed to reward longtime service in a single nonprofit career, allowing for extra catch-up contributions for eligible employees later in their careers.
Additionally, 403(b) plans often have more limited investment options than a traditional 401(k), says Melissa Jean-Baptiste, financial educator and author of “So This Is Why I’m Broke: Money Lessons on Financial Literacy, Passive Income and Generational Wealth.”
“When it comes to retirement savings, the 401(k) and 403(b) are like fraternal twins. They share many similarities but aren’t exactly the same. Both a traditional 403(b) and a traditional 401(k) share the same annual contribution limits and typically will have a vesting schedule created by the employer. However, a 401(k) usually has a broader range of investment options, whereas a 403(b) tends to have a more limited selection,” Jean-Baptiste says.
What Happens to My 403(b) If I Quit Education?
If you decide to take the plunge and leave your education or nonprofit career, the money in your 403(b) will be safe. It still belongs to you, and you have the option to leave it as it is or move it to another retirement account.
[Read: How to Rollover Your 401(k).]
“When someone leaves a job in education and is officially separated from service there are several options the employee has with their 403(b) account,” says Evan Press, certified financial planner with Equitable Advisors.
“Since separation of service is a qualifying event under the IRS code, an employee may move the 403(b) to an IRA, move it to the next employer plan at a new job or simply leave it in the 403(b) plan with the former employer (in most cases). Any of these options would occur without an IRS penalty or taxes,” he adds.
You could also make a withdrawal from the account, he says, but you could be subject to steep tax penalties.
How to Roll Over Your 403(b) to Another Retirement Account
Similar to a 401(k) plan from a former employer, “you can and usually should roll the plan over to a rollover IRA account. The fees will almost always be lower and the investment choices greater,” says Susan Olson, certified financial planner and partner at Abacus Wealth Partners.
You could also roll funds into a 401(k) but no matter what, combining your retirement savings is a good move, says Jean-Baptiste.
“The most important thing to remember is not to leave the money behind. Besides making estate planning easier, by consolidating your retirement savings you are also preserving as much of your money as possible by avoiding the maintenance fees that are charged when you are no longer working for the company,” she says.
Each rollover option has different pros and cons.
Roll 403(b) to IRA
There are many different kinds of IRA accounts designed for different purposes and with their own tax policies. A rollover IRA is specifically designed for pooling funds from previous retirement accounts.
According to Jean-Baptiste, this is one of the simpler options for your 403(b) funds.
“If you are investing in a traditional 403(b), you will likely have to transfer your money into a traditional IRA,” she says. “This will be the easiest route paperwork-wise as well as the simplest path when tax season rolls around.”
The actual process might vary by brokerage, she adds, but an advisor with your new retirement plan holder should be able to help with logistics.
“There are also companies like Capitalize that will do the heavy lifting for you for free. They make sure your retirement money gets from point A to point B without you having to do much of anything,” Jean-Baptiste says.
[Read: A Guide to Your IRA.]
Roll 403(b) to 401(k)
If you are leaving your 403(b) eligible job for one that offers a traditional 401(k), you might also be able to roll over funds into that new account. That way, as you continue to add to your retirement savings you can manage your money in one place.
Just like an IRA rollover, an advisor at your new plan provider should be able to assist with the logistics. Once you decide to move your money, speak with a human resources representative at your company about the best person to help you out.
Pros and Cons of Rolling Over Your 403(b)
“Educators often have little time to focus on their investments and leave funds in a 403(b) after leaving a teaching job because it is just easier. But comparing fees and costs between the 403(b) and an IRA, investors can have more control over their investments and often reduce the fees,” says Olson.
“Reducing fees means more money over time, and consolidating multiple 403(b) accounts into one IRA simplifies one’s financial life,” Olson adds.
Choosing which account is right for you will depend on your other goals. IRAs have lower contribution limits than 401(k) plans, but a rollover IRA can be a landing place for funds if you do a lot of job-hopping.
Additionally, you could choose either a Roth or traditional IRA depending on if you want to make pre- or post-tax contributions.
[READ: Deciding Between a Roth vs. Traditional IRA.]
On the other hand, many 401(k) accounts come with a company match — essentially free money added to your retirement fund each pay period. If you’re having trouble deciding, consider consulting with a financial advisor.
Planning for Retirement After a Career Change
During any career change, it is important to consider how the shift will affect your retirement and adjust your savings.
“If you are planning to make a career change and want to continue planning for retirement, consider looking into retirement benefits offered in the companies and roles you’re looking into. When you reach the interview stage, you can also ask questions specifically about retirement benefits provided in the benefits package,” says Jean-Baptiste.
This transitionary period is also a great chance to see if you can increase your contributions to meet your goals, she adds.
“The last step once you’ve secured a new job: Consider contributing a specific and manageable percentage of your income to your retirement plan. Every time you get a raise or bonus, you can increase your contributions by 1%,” she says.
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What Happens to Your 403(b) If You Quit? originally appeared on usnews.com
