Types of Accounts: 401(k) & 403(b) Differences

• 401(k): are offered by for profit companies, including sole proprietorships, partnerships, corporations, and even government entities. Administrative costs are usually higher than a 403(b).
• 403(b): are offered by nonprofit companies, religious groups, school districts, governmental organizations, and any other foundations that fall under Section 501(c)(3) of the Internal Revenue Code. Due to this fact, administrative costs are lower, allowing for organizations with very small budgets to help their employees save for retirement.

When you leave your employer, your 401(k) & 403(b) plans usually leave with you. In most cases this is determined on the conditions of your exit from the company. An example of when you may be denied your right to take it with you is if you were dishonorably discharged. Once you have determined you are eligible to take your plan with you, you now have the task of “rolling it over” into an IRA. You are no longer required to keep it with your current provider; you can now take it to your existing brokerage firm (if you have one) or with any firm that offers IRA’s. If you don’t already have a brokerage firm and need to begin looking for one, as mentioned in my earlier posts, you should find one that best fits your investment goals.

Once you have made a decision in picking a firm, you can now roll your 401(k) and/or your 403(b) into an IRA. This deposit won’t be labeled as a contribution, instead it will be labeled as a Direct Rollover, which means the funds are coming from an employer sponsored account. This is not to be confused with a regular Rollover, as that is when funds come from one IRA and are rolled into another IRA. In order to begin the process of rolling your plan into your new IRA you must first open an IRA with your brokerage firm. Once this has been done, inform your current plan provider you would like to rollover your 401(k)/403(b) into your new IRA. They will send you a form asking for the address of the firm, the account title of the IRA, and the account number among other things. Once you return the form to your plan provider, they will (in most cases) liquidate (which means sell) all positions you have in the account and either mail you the check, or directly mail it to your new brokerage firm. Your new brokerage firm will then process your deposit, and the funds will be available for you to invest with.

 

It’s important to note rollovers are typically done into a Traditional IRA, but they can be done into Roth’s. However, if done into a Roth, the rollover is subject to be taxed since Roth’s contain after-taxed dollars.