Ask an advisor: Can I roll my 401(k) retirement savings into a 403(b)?

Ask an advisor: Can I roll my 401(k) into a 403(b)?

February 23, 2023 6:19 PM

Financial advisors typically recommend rolling over savings from one 401(k) to the next. With a 403(b), it's more complicated.

Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The topic can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.

The 401(k) is by far the most common workplace retirement plan, but fewer people know of its nearly-identical twin: the 403(b).

Unlike the 401(k), which is offered to workers at private companies, the 403(b) is available to employees of nonprofit organizations like charities, public schools and certain hospitals and universities. Though there are tens of millions of workers in these fields, the 403(b)'s share of the retirement market is smaller — in 2021, the plans contained a total of $1.3 trillion in assets, as compared to the $7.7 trillion in 401(k)s.

But for those who have one, it's crucial to understand how a 403(b) works. As with a 401(k), employees can contribute to their 403(b) with a cut of their paycheck, and the resulting savings are not taxed until the owner withdraws them in retirement.

The contribution limits and other rules are largely the same for both plans. But unlike a 401(k), employers rarely match a worker's contributions to a 403(b), and the nonprofit plans usually focus more on more complicated investment devices, like annuities, as opposed to the stocks and mutual funds that typically dominate 401(k)s.

All these complex comparisons are weighing on a retirement saver in New York, who's about to get his first 403(b). After working at private companies for years, he'll be joining a nonprofit next month and wants to consolidate his savings — but he's not sure how, or even whether it's possible. Here's what he wrote:

Dear advisors,

I'm a 46-year-old video producer in New York City, and I recently got a new job. Until now, I've worked at private companies that offered 401(k)s, three of which I enrolled in. But starting in March, I'll be working for a nonprofit, which offers a 403(b). Is it possible to roll over my 401(k)s into the 403(b)? Or should I pursue some other strategy, like putting everything into an IRA? I don't have an enormous amount of savings — only a little over $10,000 in total — but I don't want to lose it. What should I do?

Sincerely,
Pondering in Park Slope

And here's what financial advisors wrote back:

Definitely, maybe

Daniel Galli, a certified financial planner and the founder of

Daniel J. Galli & Associates

in Norwell, Massachusetts

The answer is positively, absolutely maybe. You need to look at the plan document for the 403(b). Does it allow 401(k) assets to be transferred in? What investment options are there in the 403(b), and what are the internal expenses?

If it's a large 403(b), odds are it will accept the 401(k) assets and have low expenses. Having it all in one plan will make it easier for you to manage.

Consider an IRA

Lawrence Pon, a certified financial planner at

Pon & Associates

in Redwood City, California

This is a good question. It is usually a good idea to consolidate your accounts so you have all the money in one place so it is easier to manage. You diversify with the investments in these accounts.

You will need to review your investment choices in the 403(b) and see if they offer better choices than your existing 401(k)s. Which plans offer the better prices and costs?

How about rolling your existing 401(k) accounts into an IRA? This gives you much more flexibility in costs and choices of investments, and you are not limited to the choices offered by the employer.

To answer your question — "Is it possible?" — yes. But should you?

If you are working for a small nonprofit, they may not have the best costs because they may not be able to negotiate better costs with the financial providers.

The homeopathic approach

Nicholas Bunio, a certified financial planner at

Retirement Wealth Advisors

in Downingtown, Pennsylvania

Yes, you usually can — as long as you're transferring a "like to like" account. In other words, your traditional 401(k) plan can be rolled into a traditional 403(b) plan, and Roth to Roth.

An IRA allows for much more flexibility with funds and investments. But costs could be more or less. Plus, an IRA allows for professional investment management, which may or may not be beneficial to you.

Also, you still want to compare costs, fees, performance, etc., between your 401(k) and 403(b). If your new plan is expensive and has poor performance, that might be a reason not to do a rollover.

Check the docs

Kevin Brady, a certified financial planner and vice president at

Wealthspire Advisors

in New York City

Yes, a 401(k) plan balance can be rolled over to a 403(b), assuming that your plan allows it. If there is a Roth, post-tax balance in the 401(k), you will also want to confirm that the 403(b) accepts Roth contributions. This can likely be found in the "Summary Plan Document" (SPD) for your 403(b) plan, which you can likely find by asking your HR department.

As to the broader question of whether you should roll over the funds to an IRA instead, it will depend on how good the investment options are in the 403(b). You should look for index fund options (e.g. an S&P 500 index fund) with low expense ratios. This might not be the case, given 403(b)s can have poorer investment options compared to 401(k) plans of the same size, depending on the provider.

An IRA would also allow you to choose from a broader universe of investment options, though priority should still be given to a low-cost index mutual fund or ETF options.

A safe umbrella

Eddie Kramer, a certified financial planner at

Abacus Planning Group

in Columbia, South Carolina

Keep these dollars under the safety of a retirement umbrella. You can accomplish this by doing a direct rollover into an IRA or rolling the 401(k) assets into your new 403(b).

First, you need to check with your new employer plan to verify they accept rollovers into a 403(b). Some do, and some don't.

Second, you want to look at the investment options, fees and expenses within your new employer's plan. The fees and expenses in a 403(b) can be pretty high with some plans. If it's north of 1.25%, I'd recommend a rollover IRA. Are you able to invest in low-cost (i.e., less than 0.5%) mutual funds in the new 403(b)?

Again, if the new plan only offers expensive (i.e., greater than 0.5%) mutual funds, this would be another good reason to have a rollover IRA.

Managing these fees and expenses is important so that you get to keep more money as the retirement account grows.

The secret to saving for retirement is to save early, save often and make it automatic. While it is tough to do since life is expensive, you should save 15-20% of your gross salary in retirement savings at your age. You still have time to take advantage of compounding interest.

I wish you all the best in your new endeavor.