What Happens to My 403(b) When I Leave a District?

It’s that time of year—you may have retired, are changing districts, or have been hit with the news that you will not be returning to your job next year. Among the many questions you may have about such a move, top on the list may be, “What happens to my 403(b)?” or “Does my 403(b) transfer?”

When you leave your district, your 403(b) does not follow you—it stays tied to the district where you have worked. While it’s not held by the district directly—it’s held with an insurance or investment company—the account itself is tied to your employment record with the district. For educators who may change employment various times throughout their career, this can leave a trail of 403(b)s which make it hard to manage your financial situation. Ultimately, you have five 403(b) transfer options to choose from:

1. You can just leave your 403(b) where it is.

I’m not a fan of this option because it can be more difficult to pay attention to that old account. Even worse, if you move locations and don’t update your details, the 403(b) provider has no way of contacting you to get in touch about that account.

2. You can cash your 403(b) out.

Please don’t do this! Even if you maintain your 403(b) in an old district, it’s still meant for retirement. If you cash it out and you are under the age of 59.5, you’re going to pay a 10 percent penalty on the balance in addition to income taxes. Cashing out a $10,000 403(b) for a teacher in a 28 percent tax bracket will include a $1,000 penalty and $2,800 in taxes.

3. You can change the district code on your old 403(b).

For example, let’s just say you had an AXA 403(b). You start employment at a new district and fill out payroll forms to start a new 403(b) with AXA. Instead of having a new account, you can change the code on your old 403(b). By contacting AXA, they’ll change the district code on the 403(b) and you can still contribute to the same account. You get to keep the same account and take part in the joys of compounding interest with your investments. It may be different for other types of 403(b)s, or the district rules, but it shouldn’t be an arduous process.

4. You can transfer your 403(b) to a new vendor.

Sometimes this happens if you move districts or states, and the vendor you were using is not available. The only option is to start a new 403(b) with a new vendor, but you can transfer your old account into the new one. If you’ve been putting money into a 403(b) and you choose to transfer it, that company can charge you to move that money. Sometimes it’s as small as an administrative fee.

However, if you’re using a 403(b) from an insurance company that also means it’s an annuity. Annuities are insurance contracts and if you break the contract (by moving the money to another 403(b)) before the end date, there are surrender charges to get out of the contract. Annuity contracts range from five to 12 years, and the surrender charges can vary wildly between companies.

5. You can transfer your 403(b) to an IRA.

This is by far the best option when you leave a district. You can open an IRA at a bank or at a custodian, like a Charles Schwab, Fidelity, or Vanguard. They can “custody” (hold an account for you) your money for much cheaper than a 403(b) vendor would, and for the most part, you can also choose a lot more options for investments than a 403(b). In moving this account to an outside custodian, you may lose having an advisor on the account, but if you are okay with filling out paperwork and picking some simple investments, the cost savings can be substantial.