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Investors can withdraw money penalty-free from a 403b at age 59 1/2, but there are rules and penalties for early withdrawals. Exceptions include death, disability, and financial hardship. Taxes must be paid at the time of withdrawal, and beneficiaries who inherit the 403b must pay income and estate taxes. It’s important to check custodial account agreements for specific rules and consult a professional for further questions.
Generally, an investor can withdraw money from a 403b starting at age 59 1/2. If withdrawals occur at that time, there will be no penalty. If withdrawals occur before that age, there are rules and possible penalties that apply.
The 403b withdrawal can be made before age 59½ due to death, disability, or financial hardship. In cases of financial hardship, an investor must show that other financial options have been exhausted. Financial hardship is defined as one of the following: an investor must pay college tuition for himself or his dependents within 12 months of withdrawal; he needs to make a down payment on his main home; he has medical expenses to pay for himself or his dependents; or have to pay a sum of money to stop a foreclosure or eviction from his or her home.
Of course, if an investor makes a 403b early withdrawal, they might still be required to pay the 10 percent tax penalty to the Internal Revenue Service (IRS). The tax penalty would apply unless you can show the money was withdrawn due to death, disability, or an unreimbursed medical expense that exceeds 7.5 percent of adjusted gross income (AGI). Another scenario in which the investor would not need to pay the 10 percent tax penalty would be if they were required by court order to send money to their ex-spouse or dependents. Additionally, if an investor is separated from service by termination, permanent layoff, early retirement, or resignation, is age 55 or older at the time of termination, and is able to establish a schedule of equal payments on his life expectancy, these scenarios could allow the investor to avoid the tax penalty.
If an investor did not want to take a 403b withdrawal at age 59½, they could wait until age 75 for money they had already earned and contributed to the 403b as of December 31, 1986. For money contributed to the 403b after after that date, you must take a required minimum distribution (RMD) by the first day of April of the year after the year in which you reach age 70½. This is really important to remember because if an investor doesn’t take the RMD in a timely manner or if he doesn’t withdraw enough money, there will be a penalty for 50 percent of the money that was supposed to be withdrawn.
In scenarios where a beneficiary inherits the 403b and later takes a withdrawal from the 403b, the beneficiary has to pay taxes on the income. Also, the money in the 403b is included as part of the deceased person’s estate, which means estate tax must be paid. These taxes can take a significant amount of money out of the 403b account.
Of note, an investor should always check their custodial account agreements or the particular contract they signed for the information and rules that apply specifically to a 403b plan. Of course, the information mentioned above is typically how 403b withdrawals work. Local, state and federal taxes are generally paid at the time of withdrawal.
Keep in mind that even if an investor leaves their job, it is possible to keep the 403b. The reason for this is that, for investment purposes, the relationship is with the 403b provider, not the employer. If an investor has further 403b-related questions, they should consult a certified public accountant, tax attorney, or investment professional.
Smart Asset.
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