403(b) Rollover Rules: To an IRA, 401(k), or Roth Account

Your four options when leaving an employer, why direct rollover is almost always the right choice, and the surrender charge calculation you must do before rolling an annuity. Updated 17 April 2026.

Your four options when leaving an employer

Leave it

Often suboptimal

If the plan has high fees and you are no longer contributing, leaving money in the plan means continuing to pay those fees with no benefit. Exception: if the plan has very good investment options and the fees are competitive, leaving may be fine. Check.

Roll to new employer plan (403(b) or 401(k))

Good if new plan is better

Direct rollover from old plan to new plan. Preserves all tax advantages. Useful if new plan has lower fees or if you want to maintain loan access. Most employer plans accept incoming rollovers.

Roll to Traditional IRA

Usually the best option

More investment choices, lower fees, full control. At Vanguard, Fidelity, or Schwab you can hold index funds at 0.03% expense ratios. Traditional 403(b) rolls to Traditional IRA tax-free. No current tax consequence.

Cash out

Almost never correct

The full amount is taxable as ordinary income in the year of distribution, plus a 10% early withdrawal penalty if you are under 59.5. On a $50,000 account, you might net $30,000 after tax and penalties. A catastrophically bad option except in genuine financial emergencies.

Direct vs indirect rollover

Direct rollover (trustee-to-trustee)

No mandatory withholding
No 60-day deadline
Money goes directly from old plan to new plan or IRA
You never touch the money
Always choose this if possible

Indirect rollover (check to you)

Plan withholds 20% for taxes
60-day window to deposit full original amount
Must make up the 20% withheld from other funds
Claim withheld amount back at tax filing
Avoid unless unavoidable

The 60-day trap: If you miss the 60-day deposit deadline on an indirect rollover, the full amount becomes taxable ordinary income in that year plus a 10% penalty if under 59.5. The IRS allows one waiver per year for genuine hardship but the process is burdensome. Just use direct rollover.

IRA vs new employer plan: when each wins

IRA wins when:

You want maximum investment choice
New employer plan has high fees
You want full control over the account
You do not need loan access
Simplicity is important to you

New employer plan wins when:

You want loan access from the account
New plan has strong creditor protection (state law varies for IRAs)
You plan to use the rule of 55 at age 55 (not available from IRAs)
Backdoor Roth strategy (IRA balances create pro-rata complications)

Annuity surrender charges on rollover

If your 403(b) is an annuity contract and you are still within the surrender period, rolling over may trigger surrender charges of 5-8% of your account value. Before doing a rollover from an annuity 403(b), calculate whether the ongoing fee drag saving over future years offsets the one-time surrender charge.

Example calculation

$80,000 account. 6% surrender charge = $4,800 upfront cost. Annual fee saving from rolling to a 0.1% IRA vs 2.0% annuity: $80,000 x 1.9% = $1,520/year. Break-even in about 3 years. If you have more than 3 years before retirement, rolling makes sense mathematically despite the surrender charge.

How to initiate a direct rollover: step by step

1.Open the receiving IRA (or confirm new employer plan accepts rollovers) before starting the process at the old plan.
2.Contact the receiving institution (Vanguard, Fidelity, Schwab) and say you want to initiate an incoming direct rollover from a 403(b). They will give you their account details and may start the paperwork.
3.Contact your old plan provider and request a direct rollover to the receiving institution. Request that the check be made payable to 'Fidelity FBO [your name]' (or equivalent), not to you.
4.Complete any required paperwork. Some plans require a signature guarantee (similar to a notary) for transfers over a certain threshold.
5.Follow up in 2-4 weeks. Direct rollovers should complete quickly but some plans are slow. Track progress.
6.Confirm the receiving institution has received the funds and invested them in your chosen funds (they may default to a money market if not specified).
7.In January of the following year, you will receive a Form 1099-R showing the distribution from the old plan and a Form 5498 showing the rollover contribution. File correctly on your tax return (the 1099-R must be reported but the rollover amount is not taxable).

Investment options comparison Which plan to choose Withdrawal rules