What are the Rules for a 403b Withdrawal?

Elva K.

Typically, an investor can withdraw the money from a 403b starting at age 59 and a half. If the withdrawals occur at that time, there will be no penalty. If withdrawals occur before that age, there are rules and possible penalties that apply.

Investors can typically withdraw from a 403b when they are 59 and a half years old.
Investors can typically withdraw from a 403b when they are 59 and a half years old.

403b withdrawal can be made before the age of 59 and a half due to death, disability or financial hardship. In cases of financial hardship, an investor must prove that other financial options were exhausted. Financial hardship is defined as one of the following situations: an investor needs to pay for college tuition for himself or his dependents within 12 months of the withdrawal; he needs to make a down payment pertaining to his primary home; he has medical expenses to pay for himself or his dependents; or he has to pay a sum of money to stop a foreclosure or eviction from his home.

If someone makes an early 403b withdrawal, he or she may be required to pay the tax penalty of 10 percent to the IRS.
If someone makes an early 403b withdrawal, he or she may be required to pay the tax penalty of 10 percent to the IRS.

Of course, if an investor does make an early 403b withdrawal, he might still be required to pay the tax penalty of 10 percent to the Internal Revenue Service (IRS). The tax penalty would apply unless he can show that the money was withdrawn because of death, disability, or an unreimbursed medical expense which exceeds 7.5 percent of adjusted gross income (AGI). Another scenario where the investor would not need to pay the 10 percent tax penalty would be if he was required via court order to send money to his ex-spouse or dependents. In addition, if an investor is separated from her service via termination, permanent layoff, taking an early retirement, or quitting, if she is 55 years of age or older at the time of termination, and if she is able to establish a schedule of equal payments over her life expectancy, these scenarios might enable the investor to avoid the tax penalty.

If an investor did not want to take a 403b withdrawal at age 59 and a half, he could wait as late as age 75 for money that was already earned and contributed to the 403b as of 31 December 1986. For money that was contributed to the 403b after that date, he is to take a required minimum distribution (RMD) by the first day of April of the year after the year he reaches age 70 and a half. It is really important to remember this because if an investor does not take the RMD in a timely manner or if he fails to withdraw enough money, there will be a penalty for 50 percent share of the money that was supposed to have been taken out.

In scenarios where a beneficiary inherits the 403b and subsequently takes a 403b withdrawal, 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 that estate tax must be paid. These taxes can take a sizable amount of money out of the 403b account.

Of note, an investor should always check her custodial account agreements or the particular contract she signed for the information and rules that specifically apply to a 403b plan. Granted, the above mentioned information is typically how 403b withdrawals work. Local, state, and federal taxes are usually paid at the time of withdrawal.

Keep in mind that even if an investor leaves his job, it is possible to keep the 403b. The reason for this is that, for investment purposes, the relationship is with the 403b vendor, not with the employer. If an investor has further 403b-related questions, he should consult a certified public accountant, a tax lawyer, or investment professional.

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Discussion Comments

@certrelant - Hiring an accountant to help understand complicated employer contribution-based plans is a good idea. However, a financial planner is also a good option.

In addition to deciphering rules and restrictions of existing plans, a financial planner can provide other investment options, of which there are many.

Many people do not realize that reverse mortgages and even life insurance policies are investment products that not only provide money for beneficiaries when the policy holder dies, but also can be structured pay them throughout their retirement while still alive.

In short, a financial planner can give advice on how to make money off of the funds received from retirement and pension plans and maximize a person's life savings.


Hiring an accountant could be the key to getting the most out of any retirement plan at as little cost to the participant as possible.

Retirement plans are becoming more and more rare, partially because many employers simply cannot afford to continue matching contributions and partially because people change jobs on a regular basis.

Rules for transferring retirement plans that include employer contributions to a new job are complicated and restrictive.

Because of these complexities, many people assume whatever relatively small amount is in the account at the time they changes jobs is not worth the hassle of transferring.

Those who do maintain their accounts until retirement or the eligible cash-out age may find the potential penalties and withdrawal restrictions even more daunting.

Paying a fee to a licensed accounting professional could pay for itself in peace of mind.

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