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A 403(b) plan, also commonly referred to as a tax-sheltered annuity is a retirement plan available for employees who work for non-profit organizations, public schools, and ministries. The 403(b) withdrawal rules specify when you are eligible for 403(b) distributions, your withdrawal options, RMD’s and loan options. If you happen to have a 403(b) plan it’s important to be aware of these rules as they are critical to your retirement.

Summary

  • 403(b) withdrawal rules outline your eligibility and distributions options for retirement
  • A 403(b) plan has standard withdrawal and early withdrawal options
  • Early withdrawal options have to meet certain criteria for eligibility 
  • 403(b) plans are subject to minimum distributions starting at age 72
  • Depending on your provider, your 403(b) plan may have a loan option

What are the Rules for Withdrawing From a 403(b) – Standard Withdrawal 

To withdraw funds from a 403(b) plan you will need to meet the following qualifying criteria below for a standard withdrawal:

  • Reach age 59.5
  • Employment termination
  • A disability that prevents you from working
  • Financial hardship 
  • Death (primary beneficiaries will be able to make withdrawals from the plan)
  • Taking a 403(b) loan (subject to approval) 

These are the main rules that permit you to access funds inside your 403(b) retirement plan. When you begin taking distributions from your 403(b) plan the amount is taxed at your income tax bracket. If you also have a 403(b) Roth account, distributions are not taxed because contributions to a 403(b) Roth are done post-tax.

When Can You Withdraw Money From a 403(b) Without Penalty – Early Withdrawal 

Certain instances qualify you for early 403(b) withdrawals without paying the 10% early withdrawal penalty. They include:

  • The Rule of 55 – permits you to take early distributions in the year you leave work as long as you turn 55 or older that same year.
  • Rule 72(t) – This rule gives you the ability to take early 403(b) withdrawals at any point without a penalty. However, it requires you to take equal periodic payments for a minimum of 5 years or until you turn 59.5. 
  • Medical Expenses – You can take early withdrawal without facing a penalty if you plan on using the funds to cover medical expenses. 
  • Disability – If you become disabled and can’t work you won’t pay any early withdrawal penalties

Knowing these 403(b) early withdrawal exceptions can help you prep for your financial future effectively. If you think you qualify for early withdrawals but aren’t sure, consult with an experienced financial advisor that can point you in the right direction.

Is There a Required Minimum Distribution RMD For a 403(b)

Plan participants in a 403(b) plan can’t keep funds in the account indefinitely. The required minimum distribution age for 403(b) plans is 72. The required annual distribution amount depends on the account balance and the end of the prior year and what the IRS life expectancy tables projects. A few other important things to keep in mind about minimum distributions for a 403(b) include:

  • You can withdraw more than the required minimum distribution amount
  • Minimum distribution will be taxed at your regular income tax rate
  • The majority of plan administrators automatically calculate your minimum distributions when you turn 72
  • Failure to take minimum distributions from your 403(b) is subject to a 50% tax, and you are still have to take the minimum distribution

As you can see, being aware of the RMDs for your 403(b) plan can help you stay prepped for retirement, avoid unnecessary taxes, and consider alternative options for your retirement funds.

Recommended Reading: 401(k) vs 403(b): Differences, Similarities – Which One is Better?

Important Note: 403(b) Roth IRA participants aren’t required to take minimum distribution withdrawals, only in the event of a death.

403(b) Loans and Rules

Depending on your 403(b) plan provider, you may have the option to take a loan out. A 403(b) loan allows you to tap into your retirement funds to make a qualifying purchase and then pay the loan off (with interest) over 3-5 years. The payback period will vary based on the plan provider and the loan options they have available. Below are important loan rules to keep in mind:

  • 403(b) loans are limited to $50,000 or 50% of the account balance
  • Payments to the loan are withheld from your paycheck like standard 403(b) contributions
  • If you leave your company before paying off the loan, you will have to pay back the entire balance within 90 days
  • The payback period for 403(b) loans ranges between 3-5 years, with 5 years being the max 
  • Qualified 403(b) loans include: house purchase or house repairs, hardship loans
  • Interest rates for 403(b) loans tend to be low, usually the prime rate + 1%

In certain situations, you may have the option to extend the payback period beyond 5 years. This will vary based on your plan provider. So if you’re thinking about tapping into your account balance, make sure you understand the loan agreement’s terms and conditions.

Important Note: Some plan providers may have a pre-payment penalty for paying off the loan early. Check your plan provider’s loan terms and conditions to verify.

Conclusion 

Generally speaking, rules and guidelines for 403(b) plans are very similar to those of 401(k) plans. Knowing the 403(b) withdrawal rules and legal regulations can help you make the most of the plan. In addition to this, you can maximize your savings, reduce your taxable income, and ensure you on track for retirement.


FAQ’s

Can you withdraw from a 403(b) while still employed?

Yes, you can withdraw funds from a 403(b) as long as you meet the necessary qualifying requirements for early distribution.

Can I cash out my 403(b) to buy a house?

If you withdraw funds from your 403(b) to purchase a home, you will be subject to a 10% penalty tax. In addition, you will also have to pay the necessary income tax. An alternative option to purchasing your home with funds from your 403(b) plan is to take out a loan against the balance. The benefit is that the 403(b) loan doesn’t impact your credit score or your DTI when applying for a mortgage.

How Much Tax Do You Pay on a 403(b) Withdrawal?

Early 403(b) withdrawals are subject to a 10% penalty tax. Standard qualified distributions are taxed at the appropriate income level. A 403(b) Roth is not subject to taxes.

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