What Should You Do With Your 403(b) After Retirement?

Once you retire, your 403(b) gives you four practical choices: leave the money in the plan, roll it into an IRA or a new employer’s plan, take withdrawals, or use the balance to buy an annuity. What you should do with your 403(b) after retirement depends on your age, your tax picture, and how soon you’ll need the income, because each path is taxed differently and federal law eventually forces you to start drawing the account down whether you want to or not.

Leaving the Money in the Plan

You don’t have to move anything. Most plan sponsors let you keep the account open after you separate from service as long as the balance stays above a threshold, commonly $5,000. Fall below that and the plan may cash you out automatically.¹ Your money keeps growing tax-deferred, and you don’t owe the IRS anything until you take a distribution.

The tradeoff: you’re stuck with whatever investment menu and fee structure your former employer negotiated, you can’t add new contributions, and you have no say if the employer switches recordkeepers or changes the fund lineup. Keep your contact information and beneficiary designations current with the plan administrator. Outdated records are one of the most common reasons retirees lose track of retirement money.

Rolling Over to an IRA

Moving your 403(b) into an Individual Retirement Account is the most popular choice for retirees who want more control. An IRA at a brokerage firm opens up thousands of funds, individual stocks, bonds, and ETFs instead of the limited menu inside a typical 403(b). You choose the custodian, open the account, and give the 403(b) plan administrator the new account number and transfer instructions.

If your 403(b) contributions were pre-tax, rolling into a Traditional IRA keeps the tax deferral going. Rolling pre-tax money into a Roth IRA is allowed, but the entire converted amount becomes taxable income in the year you do it.² That can be a smart long-term play if you retire in a low tax bracket, but the upfront bill on a large balance can be substantial.

Always request a direct rollover, sometimes called a trustee-to-trustee transfer. The money goes straight from the 403(b) to the IRA without passing through your hands, and no taxes are withheld. If you take an indirect rollover instead, the plan must withhold 20% for federal taxes, and you have exactly 60 days to deposit the full original amount into the new account.³ Miss the deadline and the whole distribution becomes taxable income, plus a possible penalty if you’re under 59½.

The Charitable Giving Advantage

One underappreciated reason to roll into a Traditional IRA is access to qualified charitable distributions. A QCD lets you send up to $105,000 per year (adjusted for inflation) directly from your IRA to a qualifying charity. The amount counts toward your required minimum distribution but stays out of your taxable income. You cannot make a QCD directly from a 403(b). If charitable giving is part of your plan, rolling into an IRA first unlocks this once you reach age 70½.

Rolling Into a New Employer’s Plan

If you move to another job at a public school, hospital, or eligible nonprofit, you can roll your old 403(b) into the new employer’s 403(b) or 401(k). The receiving plan has to accept incoming rollovers, and not all do, so check with the new HR department before you initiate anything.⁴ Consolidating simplifies tracking and can make required minimum distributions easier to manage later. Keep the transfer trustee-to-trustee to avoid the 20% mandatory withholding that hits when funds pass through your hands.³

Taking Withdrawals

You can pull the money out as a lump sum, on a scheduled installment plan, or as needed. Every dollar you withdraw from a traditional (pre-tax) 403(b) is taxed as ordinary income at your marginal rate that year, both original contributions and investment gains.⁵ A large lump sum can push you into a higher bracket, raise your Medicare premiums through IRMAA surcharges, and make more of your Social Security benefits taxable. Spreading withdrawals over several years usually produces a lower total tax bill.

The plan must withhold 20% for federal income taxes on any eligible rollover distribution paid directly to you.⁵ You can adjust withholding upward if you expect to owe more, but you cannot go below 20% on these payouts. State taxes may also apply.

Retiring Before 59½

Withdrawals from your 403(b) before age 59½ generally trigger a 10% additional tax on top of regular income taxes.⁶ On a $100,000 withdrawal in the 22% bracket, that’s an extra $10,000 on top of $22,000 in income tax.

Several exceptions can save you from the penalty:

Leaving your employer during or after the year you turn 55 lets you take penalty-free withdrawals from that employer’s 403(b). Public safety employees of state or local governments get this break at age 50.⁶
Substantially equal periodic payments based on your life expectancy avoid the penalty at any age, but you must keep them going at least five years or until you turn 59½, whichever is later.⁷
Distributions due to total and permanent disability, or paid to beneficiaries after the account holder’s death, are exempt.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income can be withdrawn without penalty.
Qualified disaster distributions up to $22,000 are available if you suffered economic loss from a federally declared disaster.

The age-55 rule is specific to the employer plan you’re leaving. Roll the balance into an IRA and then withdraw before 59½, and the age-55 exception no longer applies. IRAs don’t get it.⁶ Early retirees sometimes make a costly mistake by rushing the rollover before they’ve drawn what they need.

Buying an Annuity

You can use part or all of your 403(b) balance to buy a commercial annuity from an insurance company. The annuity converts your lump sum into guaranteed payments (monthly, quarterly, or annually) for a set period or for life. Fixed annuities pay a predictable amount based on a locked-in interest rate; variable annuities tie payments to the performance of underlying portfolios, so income fluctuates. The guaranteed stream can ease the fear of outliving your savings, but annuity contracts often carry higher fees than an IRA and can be difficult to unwind once purchased. The plan administrator sends the funds directly to the insurance company to preserve tax deferral.

Required Minimum Distributions

Federal law eventually forces you to start taking money out. The age depends on when you were born:

Born in 1959 or earlier: RMDs begin at age 73.⁸
Born in 1960 or later: RMDs begin at age 75.

Your first RMD is due by April 1 of the year after you reach your applicable age. Every RMD after that is due by December 31.⁹ Be careful with that first-year delay: pushing your first RMD into the following calendar year means you’ll owe two RMDs in the same year, and the combined tax hit can be unpleasant.

The amount is your account balance as of the prior December 31 divided by a life expectancy factor from the IRS Uniform Lifetime Table in Publication 590-B.¹⁰ The divisor shrinks each year, so the required percentage grows as you age.

Still Working Past RMD Age

If you’re past your RMD age but still working for the employer that sponsors your 403(b), you can delay RMDs from that specific plan until the year you actually retire.¹¹ The exception doesn’t apply if you own 5% or more of the organization, which is uncommon at schools and hospitals but possible at smaller nonprofits. The delay only covers the current employer’s plan. Any IRA or old 403(b) from a previous job still follows the normal schedule.

Pre-1987 Balances

Long-tenured employees may have contributions in their 403(b) that predate 1987. If the plan kept separate records for those pre-1987 amounts, they follow a more generous schedule: distributions don’t have to start until the year you turn 75 or the year after you retire, whichever is later.¹¹ If the plan didn’t maintain separate records, the whole balance follows the standard rules. Worth asking your plan administrator if you’ve been with the same school district or hospital for decades.

If You Miss an RMD

The penalty for skipping a required distribution is an excise tax of 25% on the amount you should have withdrawn.⁹ Catch the mistake and take the missed amount within two years and the penalty drops to 10%. You can also request a full waiver by filing Form 5329 with a letter explaining that the shortfall was a reasonable error and that you’ve fixed it.¹¹ The IRS grants these fairly often when the mistake is clearly unintentional.

Roth 403(b) Accounts

If your 403(b) includes a designated Roth account (contributions made with after-tax dollars), the rules shift. Roth 403(b) accounts are exempt from RMDs during your lifetime.¹¹ The money can stay put and keep growing tax-free.

Withdrawals from a Roth 403(b) are completely tax-free if they qualify as a “qualified distribution.” That requires two things: you must be at least 59½, and at least five tax years must have passed since your first Roth contribution to the plan.¹² Start making Roth contributions at 60 and you’d need to wait until 65 for fully tax-free withdrawals. Before the five-year mark, the earnings portion is taxable and potentially subject to the 10% penalty.

What Your Heirs Will Face

How your beneficiaries handle an inherited 403(b) depends on their relationship to you. For account holders who die in 2020 or later, most non-spouse beneficiaries must empty the account within 10 years of the owner’s death.¹³ There’s no annual minimum during those 10 years so long as the account is emptied by the deadline.

Certain “eligible designated beneficiaries” can stretch distributions over their own life expectancy instead:

A surviving spouse can roll the account into their own IRA, treat it as their own, or take life-expectancy distributions.
Disabled or chronically ill individuals can elect life-expectancy payments.
Beneficiaries no more than 10 years younger than the account owner also qualify for life-expectancy distributions.
Minor children of the account owner use life-expectancy distributions until they reach the age of majority, when the 10-year clock starts.

Beneficiaries that aren’t individuals, such as estates, charities, and certain trusts, follow older distribution rules rather than the 10-year framework.¹⁰ The beneficiary form on file with your plan controls what happens, and it overrides whatever your will says. Review it whenever your family situation changes.

1
Internal Revenue Service. 401(k) Resource Guide – Plan Participants – General Distribution Rules
2
Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans
3
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
4
Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
5
Internal Revenue Service. Pensions and Annuity Withholding
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. Substantially Equal Periodic Payments
8
Congressional Research Service. Required Minimum Distribution (RMD) Rules for Original Owners
9
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
10
Internal Revenue Service. Publication 590-B, Distributions From Individual Retirement Arrangements (IRAs)
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
13
Internal Revenue Service. Retirement Topics – Beneficiary