My 403(b) Plan? What’s the Best Way to Deal with it?

Investopedia’s article, “How a 403(b) Works After Retirement,” explains that your 403(b) plan is either: (i) a tax-sheltered deferred annuity from an insurance company; (ii) a custodial account at a brokerage invested in mutual funds or (iii) an account that lets you invest in either.

Your contributions were probably made on a pretax basis (like those to a 401(k) plan). Some 403(b) plans offer the option to make what is known as a Designated Roth contribution with after-tax dollars. Note that you’re not required to take all or any funds from your 403(b), when you retire. If you leave funds in your 403(b) account, they’ll keep accumulating until you withdraw them, annuitize them, or roll them over.

Withdrawals. If you do plan to make withdrawals–and if you retire before 55–you’ll have to pay regular income taxes, plus a 10% penalty on the amount, unless you agree to “substantially equal periodic payments” for at least five years or until you reach the age of 59½ (whichever is longer). The amount of those payments is based on your expected lifespan. This is for the conventional 403(b) plan.

With the Roth version, you don't pay income tax, since the contributions were made with post-tax earnings. However, the penalty will still apply. If you’re 55 or older when you retire, you can opt to withdraw some or all of your funds in a lump sum. However, any amount you withdraw doesn’t qualify as a lump-sum distribution under the 10-year tax option, so you can’t spread your tax liability over a decade. You must pay all the income taxes due on the amount, the year you withdraw the funds. With a big withdrawal, this could push you into a higher tax bracket.

When you turn 70½, the government mandates that you begin withdrawing funds from your account. There's a required minimum distribution (RMD) that you must take annually.

Annuity Option. Regardless of the type of 403(b) plan you have, you may want to annuitize some or all of it when you retire. With periodic, fixed payouts, you give yourself with a guaranteed income stream for life (or some period). Most experts caution against annuitizing the entire balance in your retirement plan, especially if you’re already receiving a defined benefit pension. If you are, it means part of your retirement income is already in a type of annuity, so you may want to keep some flexibility with your other assets. Your annuity also doesn't have to end when you die, since you can bequeath it to another person (there may be a gift tax upon your death). However, if it’s a joint and survivor annuity, where only you and your spouse have the right to receive payments, the annuity will probably qualify for the unlimited marital deduction.

Rollover. You may decide to roll over part (or all) of your 403(b) plan into another sort of tax-advantaged account, like a 401(k) (at another employer), a traditional IRA, a Roth IRA, a corporate 403(a) annuity-based plan or a government-sponsored 457 plan. This gives you more ready access to your funds, different and more varied investment options and perhaps better money management during your retirement years.

Of course, there are rules on what you are able to roll over. Typically, you must roll over distribution amounts received within 60 calendar days, in order for the amount to be treated as nontaxable. You can’t roll over RMDs or any of those “substantially equal periodic payments” from an early retirement (before age 55). You are allowed to roll 403(b) funds into a Roth IRA, if the account has the same restrictions as with a rollover from a traditional IRA.

Contact your plan sponsor and get the details on how to withdraw funds. Talk with your estate planning attorney about how this may impact your retirement and estate strategies.

Reference: Investopedia (December 12, 2018) “How a 403(b) Works After Retirement”