We’re not going to sugar-coat this one, it can be a little tricky trying to figure out the steps required to do a rollover. But the good news is that once you understand the process, it’s a fairly easy thing to do. Here’s what you need to know.

What does it mean to rollover your retirement plan?

When you leave your employer, you need to make a decision about what to do with your retirement plan, this is generally what causes the need to do a rollover. Simply put, a rollover is transferring one retirement plan into another retirement plan, without experiencing any tax consequences.

Advantages of rolling over your 403(b) or 457 plan

There are several advantages to roll over a 403(b) or 457 plan into an IRA account. Let’s look at a few.

You’ll have more investment options

403(b) and 457 plans generally offer limited investment options. With an IRA, you have access to a greater range of investments, including some that may be more suitable to your retirement goals and risk tolerance. When selecting your    investment options make sure you look at the fees you are being charged.

Greater flexibility

Some plans allow only lump-sum distributions and others may limit the frequency of withdrawals. If you roll the money into an IRA, you can take it out on your own schedule, provided you are at least age 59½.*

More convenience

If you’ve worked at different jobs throughout your career, think about rolling all of your previous employers' plan balances into an IRA. This way, you'll have a single, consolidated account to track.

Potential estate-planning benefits

With some 403(b) and 457 plans, heirs must take out all the assets after the account holder dies and face a potentially large tax bill. Beneficiaries of IRAs may be able to stretch distributions out over their lifetimes.**

Disadvantages of rolling over your 403(b) or 457 plan into an IRA

Here are a few reasons not to roll over your plan.

Age Matters

If you leave your job at 55 or older, you can take penalty-free distributions from your 403(b) plan. You can also take penalty-free distributions from a 457 plan at any age if you leave your job. With an IRA, you must be 59½ to take penalty-free distributions in most cases. 

Your investments

If all or part of your balance is in an annuity that would result in substantial surrender fees if you take it out, you may want to consider leaving the money in your current 403(b) or 457 plan.

Something To Consider

If you decide to roll over your 403(b) or 457 plan, be sure your district transfers your balance directly into an IRA. If the distribution is made to you first, the plan must withhold 20% for federal withholding taxes. Then, you’ll need to come up with another 20% from other sources to equal your full roll over amount and deposit it in an IRA within 60 days or it will be considered a distribution. In that case, you’ll then be taxed on the entire amount at ordinary income tax rates, and may owe a 10% tax penalty if you are younger than age 55 and have separated from work. Avoid this situation if at all possible.

Additional Considerations

*IRA withdrawals made before age 59 ½, with certain exceptions, are subject to a 10% tax penalty. You are required to start taking distributions from a traditional IRA at age 70 ½ or face a 50% tax penalty on the amount that should have been withdrawn, but wasn't.

***Spouses may roll over inherited IRAs and treat them as their own. Non-spouse beneficiaries are subject to IRS distribution rules for inherited IRAs.

Please note that neither California Teachers Association nor any of its affiliates give tax advice. Consult a tax advisor for information specific to your situation.