When you retire, you generally have four options for your 403(b): leave the money in the plan, roll it into an IRA, roll it into a new employer’s retirement plan, or take a cash distribution. The right move depends on your age, how soon you need the money, what fees your current plan charges, and how you want to manage taxes in retirement.
Your Four Main Options
Each path has trade-offs worth understanding before you move any money.
Leave the money in your 403(b). If your former employer allows it, you can keep your funds right where they are. This makes sense if your plan offers low-cost investment options or institutional funds you wouldn’t have access to in a retail IRA. The downside is that employer plans typically offer a limited menu of investments, and once you leave the organization, you lose the ability to make new contributions. You’re also subject to whatever rules the plan sets for withdrawal frequency and methods.
Roll the funds into a traditional IRA. This is the most popular choice for retirees. A rollover IRA gives you access to a much wider range of investments, including individual stocks, bonds, ETFs, and funds from any provider. You can choose a brokerage with low fees and consolidate other old retirement accounts in the same place. As long as you do a direct rollover (where the money transfers from your 403(b) custodian straight to the IRA custodian), there’s no tax hit and no penalty.
Roll into a new employer’s plan. If you’re moving to a new job that offers a 401(k) or another 403(b), you can transfer the balance there. This keeps everything in one account, but it only makes sense if the new plan has good investment choices and reasonable fees.
Take a lump-sum distribution. You can cash out part or all of your 403(b). The full amount of a traditional 403(b) withdrawal counts as ordinary income in the year you receive it, which could push you into a higher tax bracket. If you’re under 59½ and don’t qualify for an exception, you’ll also owe a 10% early withdrawal penalty. For most retirees, cashing out a large balance all at once is the most expensive option from a tax perspective.
Watch for Annuity Surrender Charges
Many 403(b) plans, especially those at schools, hospitals, and nonprofits, hold your money in annuity contracts issued by insurance companies rather than in mutual funds. If yours is an annuity-based 403(b), check whether a surrender charge applies before you move or withdraw funds. These fees penalize you for pulling money out during a set window, often six or seven years from when each contribution was made.
A typical surrender charge schedule starts at around 6% in the first year and drops by one percentage point each year until it reaches zero. So if you transfer money that’s been in the contract for only three years, you might lose 4% of that portion to the insurance company. Most annuity contracts do include a “free withdrawal provision” that lets you take out a certain percentage, often 10% of your balance per year, without triggering any surrender fee. Surrender charges are also commonly waived for required minimum distributions and death benefits.
Before initiating any rollover, call your plan administrator and ask specifically whether surrender charges apply and how much of your balance is free of them. If a large chunk of your money is still inside the surrender period, it may be worth leaving those funds in place for another year or two while rolling over the rest.
How Taxes Work on Withdrawals
Distributions from a traditional 403(b) are taxed as ordinary income at your federal (and usually state) rate. There’s no special capital gains treatment, regardless of how long the money was invested. Every dollar you withdraw gets added to your other income for the year, which determines your tax bracket.
If your 403(b) has a Roth component (contributions you made with after-tax dollars), qualified withdrawals from that portion come out tax-free. To qualify, you must be at least 59½ and the Roth account must have been open for at least five years.
This tax difference is why many retirees prefer to roll their traditional 403(b) into a traditional IRA and then control the timing and size of withdrawals each year. By spreading distributions across multiple years, you can stay in a lower tax bracket instead of taking one large taxable lump sum. Some retirees also convert portions of their traditional balance to a Roth IRA in years when their income is lower, paying tax now at a reduced rate to enjoy tax-free growth and withdrawals later.
The Rule of 55 for Early Retirees
If you retire before age 59½, withdrawals from a 403(b) or other qualified plan normally trigger a 10% early withdrawal penalty on top of regular income tax. But the IRS provides an exception: if you separate from service during or after the calendar year you turn 55, you can take penalty-free distributions from that employer’s plan. Public safety employees of state or local governments qualify at age 50.
This exception applies only to the plan tied to the employer you just left. It does not apply to IRAs. So if you’re between 55 and 59½ and think you’ll need the money, it may be smarter to leave your 403(b) in the employer plan (or take distributions before rolling over) rather than moving everything into an IRA and losing access to this penalty-free window. Once the funds are in an IRA, early withdrawals before 59½ are subject to the 10% penalty unless you qualify under a different exception.
Required Minimum Distributions
You can’t leave money in a tax-deferred account forever. The IRS requires you to start taking withdrawals, called required minimum distributions (RMDs), once you reach age 73. Your first RMD is due by April 1 of the year after you turn 73, and subsequent RMDs are due by December 31 each year. If you delay your first distribution to the following April, you’ll end up taking two RMDs in the same calendar year, which could create a larger-than-expected tax bill.
There’s one notable exception: if you’re still working for the employer that sponsors your 403(b) and the plan document allows it, you may be able to delay RMDs from that specific plan until the year you actually retire. This “still working” exception doesn’t apply to IRAs or plans from former employers, only to the plan at your current job.
RMD amounts are calculated by dividing your account balance (as of December 31 of the prior year) by a life expectancy factor from IRS tables. The percentage you must withdraw increases each year as you age. Missing an RMD triggers a steep penalty: 25% of the amount you should have taken, reduced to 10% if you correct the shortfall within two years.
Deciding What Makes Sense for You
Start by gathering the specifics of your situation: your current 403(b) balance, what it’s invested in (mutual funds vs. annuity contracts), any surrender charges, and the plan’s fee structure. Then think through these questions:
- Do you need the money before 59½? If yes, and you’re 55 or older, keeping funds in the employer plan preserves penalty-free access.
- Are your plan fees high? Many older 403(b) annuity contracts charge 1.5% to 2.5% in annual fees. Rolling to a low-cost IRA at a major brokerage could save you thousands over a long retirement.
- Do you want more investment choices? An IRA gives you virtually unlimited options compared to the handful of funds in a typical employer plan.
- Are you trying to manage your tax bracket? An IRA rollover gives you full control over how much you withdraw each year, and opens the door to partial Roth conversions in low-income years.
- Do surrender charges apply? If so, calculate the cost of moving now versus waiting. A 4% surrender charge on a $200,000 balance is $8,000, which may justify patience.
For most retirees, rolling a 403(b) into a traditional IRA offers the best combination of flexibility, lower fees, and tax control. The main exceptions are early retirees who need the rule-of-55 penalty exemption and people whose 403(b) plans offer unusually strong, low-cost investment options worth keeping.