What Can I Do With My 403(b) Once You Retire? A Strategic Guide to Your Three Main Options

When you retire from an employer offering a 403(b) plan, one of the most important decisions you’ll face isn’t about your daily life—it’s about what to do with your retirement savings. Understanding what can you do with your 403(b) at retirement is crucial because the right choice can save you thousands in taxes and significantly impact your retirement lifestyle. You essentially have three main paths: keep the money where it is, transfer it to an IRA, or take the funds out and reinvest them in a taxable account.

Three Strategic Paths Forward: Understanding Your 403(b) Options

Before diving into the details, let’s look at the big picture. When retirement day arrives, your 403(b) doesn’t automatically disappear or transfer. Instead, you’re the one who needs to decide its fate. For many retirees, the decision comes down to convenience versus control, immediate taxes versus long-term savings, and maintaining past relationships versus striking out independently.

Here’s the reality: there’s no universally “best” choice. Your optimal path depends on your specific plan features, your overall financial situation, your tax bracket, and your investment preferences. That said, understanding each option thoroughly will help you make an informed decision that aligns with your retirement goals.

Option 1: Keep Your Money in Your Current 403(b) Plan

One straightforward path is simply leaving your money invested in your 403(b) plan after you retire. Many retirees don’t realize this is even possible—after all, you’re no longer employed by the organization offering the plan. But the plan rules often allow former employees to maintain their investments indefinitely.

This approach has particular appeal if your 403(b) is heavily invested in annuities. Because 403(b) plans tend to emphasize annuities and insurance-based products, your portfolio may already be structured around generating reliable lifetime income. If your plan offers strong annuity terms or low fees compared to what you’d find elsewhere, staying put could be advantageous.

The downsides? First, you lose flexibility. You can’t easily adjust your investments or access new opportunities without potentially facing restrictions tied to annuity contracts. Second, you remain subject to whatever future changes your former employer or plan administrator might make. Third, if your employer goes through financial difficulties or the plan gets restructured, your options become limited. For some retirees, the simplicity is worth these tradeoffs. For others, it feels like staying tethered to a former employer unnecessarily.

Option 2: Roll Your 403(b) Into an IRA for Greater Control

Rolling money from your 403(b) into an Individual Retirement Account (IRA) is the path most retirees choose, and for good reason. This option gives you control. You’re no longer dependent on your former employer’s plan administrators, and you can invest in virtually any publicly traded security you want—not just annuities and mutual funds.

Rolling Into a Traditional IRA

If you roll your pre-tax 403(b) money into a traditional IRA, there’s no immediate tax consequence. You’re simply moving money from one tax-deferred account to another. This is called a “direct rollover,” and it’s the cleanest approach. Just make sure that any annuity contracts in your 403(b) can actually be transferred—sometimes they can’t be, which could complicate your rollover.

Once the money lands in your traditional IRA, it operates under the same tax rules as your original 403(b). You’ll owe income taxes on withdrawals in retirement, and you’ll eventually face required minimum distributions (RMDs) starting at age 73.

Converting to a Roth IRA

Here’s where things get interesting—and potentially more complex. You can convert your 403(b) money into a Roth IRA, but there’s a significant upfront cost: you’ll owe income taxes on the entire amount converted in that same tax year.

However, the long-term benefits can be substantial. Once money is in a Roth IRA, qualified withdrawals come out completely tax-free. You pay no federal income taxes on either your contributions or the account’s growth. Plus, you’re not subject to RMDs during your lifetime—Roths offer unmatched flexibility.

The catch? If you’re converting and already retired, you need liquid money to pay those conversion taxes. You can take that money from your retirement account if you’re 59½ or older, but here’s the IRS restriction: if you’re under 59½, you cannot touch your converted funds for five years. This lockout period exists regardless of your age when you finally withdraw the money. For most retirees, this isn’t an issue, but it’s worth knowing if you’re converting before turning 59½.

Option 3: Take a Total Distribution and Move to a Taxable Account

Your third option is to cash out your entire 403(b) and move everything to a regular taxable brokerage account. This is called taking a “total distribution,” and for most retirees, it’s the least attractive option—though it can make sense in specific situations.

Why is it generally the weakest choice? Taxes. When you take a total distribution, you owe income tax on the entire amount in the year you withdraw it. Unlike rolling to an IRA, where you can preserve tax-deferred growth, a total distribution means your retirement nest egg gets hit with a big tax bill immediately.

After you’ve withdrawn the money and reinvested it in a taxable account, any future gains are subject to capital gains taxes. You lose the tax-deferred growth advantage that made your 403(b) valuable in the first place.

That said, there are rare scenarios where this makes sense. If your 403(b) is small, if you’re in a low tax bracket in your retirement year, or if your 403(b) holds specific investments you desperately want to liquidate immediately, a total distribution might be acceptable.

How Your 403(b) Compares to a 401(k): Key Differences That Matter

Understanding your 403(b) means understanding how it differs from the more common 401(k). On the surface, they’re nearly identical—both are tax-advantaged employer-sponsored retirement plans with the same contribution limits. In 2024, both allowed employees to contribute up to $23,000 in pre-tax salary deferrals.

But beneath this surface similarity lie some important practical differences. First, employers sponsoring 403(b) plans—typically nonprofits, public schools, and certain faith-based organizations—tend to contribute less in matching funds than employers offering 401(k)s. This reflects the generally tighter budgets in the nonprofit sector.

Second, investment options differ. A 401(k) can offer stocks, bonds, mutual funds, and diverse investment vehicles. A 403(b), by contrast, is restricted to annuities and mutual funds. In practice, this means 403(b) plans often look like they’re managed by insurance companies—because they frequently are. Insurance companies specialize in selling and managing annuities, so 403(b) portfolios tend to be annuity-heavy.

This distinction becomes important when you retire. If your 403(b) is loaded with annuities, your retirement income stream might already be structured around stable, predictable payments. For some retirees, that’s ideal. For others who want maximum flexibility and investment control, it’s a limitation.

What You Need to Know About RMDs and Your 403(b)

Once you turn 73, the IRS requires you to start taking Required Minimum Distributions (RMDs) from your 403(b) and other pre-tax retirement accounts. The IRS changed this age from 72 to 73 as part of the SECURE 2.0 Act. These distributions exist so the government can eventually collect taxes on this pre-tax money.

Here’s where your 403(b)'s annuity holdings create complications. The RMD calculation isn’t straightforward if you own annuities, because annuity contracts are treated differently depending on their stage:

If your annuities are already in pay-out phase (annuitized): The annuity payments typically don’t count toward your portfolio’s value for RMD calculations. Instead, the annuity itself is considered to be satisfying your RMD requirements through its income stream.

If your annuities aren’t yet receiving payments: They do count toward your portfolio value for RMD purposes. This matters if you’re sitting on significant annuity holdings that haven’t started paying out. When you hit 73, you might need to liquidate other assets in your 403(b) to meet your RMD, even if you didn’t want to sell those assets.

If you hold a QLAC (Qualified Longevity Annuity Contract): These special annuities won’t be included in your RMD portfolio calculation as long as you start taking income before age 85. This can be a valuable tool for managing RMDs in complex retirement portfolios.

Understanding these nuances is essential because running afoul of RMD rules can be expensive. The IRS penalizes insufficient distributions at 25% of any shortfall (with some exceptions for first-time or correctable errors).

Making Your Decision: Which 403(b) Option Is Right for You?

Choosing what to do with your 403(b) ultimately depends on your specific circumstances. If your 403(b) plan has strong investment options, low fees, and favorable annuity terms, keeping your money in place might make sense, especially if you value simplicity.

If you want investment control and flexibility in managing withdrawals, rolling to an IRA is typically the better path. A Roth conversion within that rollover deserves serious consideration if you have the funds to pay conversion taxes—the tax-free growth and withdrawal flexibility can be invaluable over a 20 or 30-year retirement.

Taking a total distribution rarely makes sense unless your circumstances are unusual. The immediate tax hit almost always outweighs the benefit of having direct control of your money in a taxable account.

Before making your final decision, consider consulting with a financial advisor who understands 403(b) plans specifically. The right choice could save you considerable money and provide greater peace of mind throughout your retirement. If you use a financial advisor, they can help you navigate annuity restrictions, optimize your tax situation, and ensure your retirement income strategy aligns with your broader financial goals.