When you quit, the money in your 403(b) stays yours and stays invested. What happens next is your choice: leave it with your former employer’s plan, roll it into another retirement account, or cash it out and pay the taxes. The one part that isn’t guaranteed is your employer’s contributions, which follow your plan’s vesting schedule. Every dollar you contributed from your own paycheck belongs to you the moment you leave, regardless of how long you worked there.
What’s Yours and What Might Not Be
Your 403(b) holds two kinds of money: the salary deferrals you made yourself and anything your employer added. Federal law makes your own contributions 100 percent vested at all times.1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
Employer contributions vest on a schedule. A plan can use cliff vesting, where you own nothing until you hit the required years of service (up to three years for defined contribution plans) and then jump to 100 percent, or graded vesting, which steps up from 20 percent after two years to 100 percent after six.2Office of the Law Revision Counsel. 26 U.S. Code 411 – Minimum Vesting Standards Quit before you’re fully vested and you forfeit the unvested portion. Your plan’s Summary Plan Description shows the exact schedule, and many employers vest faster than the federal maximums, so check before assuming you’re leaving money behind.
Leaving the Money in the Old Plan
If your vested balance is more than $7,000, you can generally leave it where it is. The plan keeps holding your account, your investments stay on the plan’s menu, and the balance keeps growing tax-deferred. You just can’t add to it or receive any more employer match.
Smaller balances are treated differently. The SECURE 2.0 Act raised the involuntary cash-out threshold to $7,000, effective in 2024.3Office of the Law Revision Counsel. 26 U.S.C. 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans If your vested balance is $7,000 or less, the plan administrator can force the money out. Balances between $1,000 and $7,000 that are forced out must be rolled automatically into an IRA the plan sponsor picks. Balances under $1,000 can be paid to you directly by check, with taxes withheld.
One reason people leave money in a former employer’s 403(b): the Rule of 55, covered below, works with the workplace plan but not with an IRA.
Rolling It Over
A rollover moves your balance into another tax-advantaged account without triggering tax. The clean way is a direct trustee-to-trustee transfer: the money goes from the old plan straight to the new custodian, and you never take possession.4Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
Pre-tax 403(b) money can go into any of the following:5Internal Revenue Service. Rollover Chart
- A traditional IRA. The most common landing spot, and no tax is due at the time of the rollover.
- A new employer’s 401(k) or 403(b), if that plan accepts incoming rollovers.
- A governmental 457(b), if your new employer is a state or local government.
- A Roth IRA. Allowed, but because you’re moving pre-tax money into an after-tax account, the entire amount becomes taxable income in the year of the conversion.
Not every plan is required to accept incoming rollovers, so confirm with the new plan administrator before starting.
Roth 403(b) money is handled separately. It rolls directly into a Roth IRA with no tax, because those contributions were already taxed on the way in.6Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts One catch: the time your money spent inside the Roth 403(b) doesn’t count toward the Roth IRA’s five-year holding period. If you’ve never had a Roth IRA before, the clock starts fresh when you open one for the rollover.
The 60-Day Rule and Why You Shouldn’t Test It
An indirect rollover means the plan sends the distribution check to you instead of the new custodian. Two things happen automatically. The plan withholds 20 percent for federal income tax before cutting the check.7Internal Revenue Service. Pensions and Annuity Withholding And you have exactly 60 days to deposit the full original balance into a new qualified account.
Here’s the trap. On a $50,000 balance, you receive $40,000. To complete the rollover, you have to deposit $50,000 into the new account, meaning you need to come up with the missing $10,000 from other funds. If you only deposit the $40,000 you got, the missing $10,000 counts as a taxable distribution and may also carry the 10 percent early withdrawal penalty if you’re under 59½.4Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions You’d get the $10,000 back later as a tax credit, but not before you file your return. Miss the 60-day window entirely and the whole distribution becomes taxable income. A direct transfer avoids every one of these problems.
Cashing Out
You can take the full balance as a lump sum, but the tax cost is significant. The plan withholds 20 percent for federal income tax before you get the check.7Internal Revenue Service. Pensions and Annuity Withholding Depending on your total income for the year, you may owe more when you file if that 20 percent didn’t cover your bracket. Most states also tax retirement distributions as ordinary income, and some do their own withholding.
If you’re under 59½, add a 10 percent early withdrawal penalty on the taxable portion.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions On a $50,000 cash-out, that’s $5,000 in penalty alone, on top of federal and state income tax. Between all of it, you can lose a third or more of the account’s value.
When the 10% Penalty Doesn’t Apply
Several exceptions let you take money from a 403(b) before 59½ without the extra 10 percent. Ordinary income tax still applies.8Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Rule of 55. If you leave your job in or after the calendar year you turn 55, distributions from that employer’s plan are penalty-free. This works for 403(b) plans but not for IRAs, which is one reason some people leave money in the workplace plan rather than rolling to an IRA.9Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
- Qualified public safety employees of state or local government can use the same separation-from-service exception starting at age 50.
- Substantially equal periodic payments taken over your life expectancy. Once you start, you must continue for at least five years or until you reach 59½, whichever is longer.10Internal Revenue Service. Substantially Equal Periodic Payments
- Total and permanent disability.
- Terminal illness certified by a physician.
- Domestic abuse victim distributions, up to the lesser of $10,000 or 50 percent of your vested balance, for distributions after December 31, 2023.
- Emergency personal expense, one per calendar year, up to $1,000.
Some of these newer categories require your plan to have adopted the SECURE 2.0 provisions, so confirm with the administrator if you think one fits your situation.
If You Have an Outstanding Plan Loan
Borrowed from your 403(b) before you left? Most plans require the balance to be paid back quickly after separation, often within 60 to 90 days depending on plan terms. If you can’t repay, the unpaid amount is treated as a distribution, meaning taxable income plus a possible 10 percent penalty if you’re under 59½.11Internal Revenue Service. Retirement Topics – Plan Loans
There’s a workaround. You can avoid the tax by rolling over an amount equal to the unpaid loan balance into an IRA or another eligible plan. The deadline is your federal tax return due date, including extensions, for the year the loan is treated as distributed.12Internal Revenue Service. Plan Loan Offsets For most people that’s the following October 15 if they file an extension.
Required Minimum Distributions Down the Road
Whether you leave the money in the old plan or roll it over, you’ll eventually be required to take money out. RMDs begin in the year you turn 73, rising to 75 starting in 2033.13Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The “still working” exception that lets active employees delay RMDs from a current employer’s plan doesn’t apply once you’ve quit. Rolling into a traditional IRA doesn’t change the RMD age or rules either. Roth 403(b) money rolled into a Roth IRA is different: a Roth IRA isn’t subject to RMDs during your lifetime, which can matter if you don’t need the income when you hit the age threshold.