Section Guide
Feature Article
Expert Q & A
403(b) ABCs

403b Defined
Salary Deferral Plans
Employer Contribution Plans
Government Regulation
Contribution Limit Overview
15-year Catch-up Limit
Over the Limit?
Withdrawing Money
403(b) Loans
When You Retire
Investing Basics
Investment Types
Transferring Money
Create a Strategy

Withdrawing Money

403(b) plans are intended to provide savings for retirement. As a result, the tax laws limit your ability to get your money out while you're still employed.

Your contributions (made under either an annuity contract or a 403(b)(7) mutual fund account) can be distributed to you while you're working for the employer sponsoring the program, only if one of the following conditions applies:

  • You have a financial hardship,
  • You turn 59 1/2, or
  • You become permanently disabled.

Employer contributions to a 403(b)(7) mutual fund account can only be distributed to you while you're working if:

  • You turn 59 1/2, or
  • You become permanently disabled.

These legal limitations don't apply to employer contributions to an annuity contract, although the terms of the contract may impose such restrictions.

Distributions may also be made in the event of your death.

Hardship withdrawals

If you encounter a financial hardship while you're employed, many 403(b) programs allow you to withdraw enough of your contributions to meet your immediate needs. In general, you can withdraw your contributions, but not any earnings on them. Most 403(b) programs let you take a hardship withdrawal if you are going to use the money to:

  • Buy a home, which must be your principal residence, not a second or vacation home;
  • Pay medical expenses for you or your dependents that weren't covered by insurance;
  • Pay a year's worth of college tuition and expenses for you or your dependents; or
  • Make overdue rent or mortgage payments to prevent your eviction or home foreclosure.

You can only withdraw the amount that you need to meet your hardship, plus an amount to cover any taxes that apply. You may be required to provide proof of the hardship. In some cases, you may not be allowed to make salary deferrals to the program for a year following your hardship withdrawal.

Hardship withdrawals are taxable as ordinary income and must be reported on your tax return. Your 403(b) vendor will send you a Form 1099-R that shows the amount of your withdrawal. In addition, your hardship withdrawal may be subject to a 10 percent federal penalty tax. (Some states impose additional similar penalty taxes.) Distributions taken for hardship may not be rolled over to other plans or IRAs.

Additionally, you are allowed to withdraw money penalty-free under the following circumstances (if your plan allows):

  • If you leave your job in the year you turn 55, or later, you can start taking money from the current plan without paying an early withdrawal penalty. However, you will have to pay applicable federal, state and local income tax on the distributions. This exception only applies to the plan offered through the employer you were working for in the year you turned 55.
  • If you are separated from service any time before age 59 1/2 and set up a payment schedule to withdraw money in substantially equal amounts over the course of your life expectancy, you will not owe the penalty. (Once you begin taking this kind of distribution, known as SEPP, you are required to continue for five years or until you reach age 59 1/2, whichever is longer.)
  • The money is exempt from the early withdrawal penalty in the following circumstances: you become totally disabled; you die and your beneficiary collects the money; you have medical bills that exceed 7.5 percent of your adjusted gross income; or you are required by the court to give money to a divorced spouse, a child or dependent. Your plan will define what constitutes a "permanent disability."

Age 59 1/2 withdrawals

Once you turn 59 1/2, you can usually start taking money out of your 403(b), even while you're still working. In general, these withdrawals are taxable as ordinary income and must be reported on your tax return. Your 403(b) vendor will send you a Form 1099-R that shows the withdrawal amount. These withdrawals are not subject to the federal 10 percent early distribution penalty tax (or most similar state taxes). In addition, they can usually be rolled over to another 403(b) program or to an IRA. If not rolled over, most distributions will be subject to mandatory federal withholding of 20 percent, if paid directly to you.

Withdrawals of after-tax contributions

If you make after-tax contributions to a 403(b) plan, you can withdraw them while you're working without tax or penalty. Earnings on the after-tax contributions are taxable, however, and may be subject to the federal 10 percent early distribution penalty tax (and similar state taxes), if you withdraw them before you turn 59 1/2, unless you qualify for an IRS-approved exception.

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