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When Can I Take Money Out of My 403(b)?

Understanding 403(b) Plans: When Can You Make Withdrawals?

The realm of retirement planning is replete with numerous plans, each with its unique sets of rules and benefits. The 403(b) plan, albeit less popular than its well-known cousin the 401(k) plan, offers excellent advantages for certain types of employees. This article delves into the critical aspects of the 403(b) plan, particularly focusing on the guidelines for making withdrawals.

Demystifying the 403(b) Plan

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan offered to employees of public schools and universities, as well as employees of tax-exempt organizations, including churches and charities. Much like the widely recognized 401(k) plan, 403(b) plans provide participants with a tax-advantaged method to save for retirement. Investment options offered within these plans typically include mutual funds and annuities.

The contribution limits for 403(b) plans align with those of 401(k) plans, and there are additional catch-up provisions for eligible employees. Despite their lesser-known status, 403(b) plans can be a critical tool for retirement savings for those who can contribute.

When Can You Withdraw from a 403(b) Plan?

One of the frequently asked questions regarding 403(b) plans revolves around the timing of withdrawals. Much like 401(k) plans, 403(b) plans carry rules about when you can start withdrawing your money.

Typically, you may withdraw your money penalty-free at age 59½. However, if you decide to withdraw funds before reaching this age, you'll generally be subject to a 10% early withdrawal penalty on top of regular income taxes. This is why taking money out of a retirement account before retirement is generally discouraged, as it can significantly diminish your overall retirement savings.

In addition to this, you are required to start taking annual withdrawals, also known as required minimum distributions (RMDs), starting on April 1st of the year you turn 70½. These rules are designed to ensure that retirement savings are used for their intended purpose – funding your retirement years.

Exceptions to the Rule: Hardship Withdrawals

While the early withdrawal penalty is a significant deterrent to accessing your 403(b) funds prematurely, there are circumstances under which you may be able to make withdrawals without incurring this penalty. These are often referred to as hardship withdrawals.

The rules for hardship withdrawals are essentially the same for 401(k) and 403(b) accounts. In cases of financial hardship, you may be allowed to withdraw a portion of your 403(b) account without incurring the usual 10% penalty. These circumstances often include emergency situations like substantial medical expenses, costs related to the purchase of a primary residence, tuition and education fees, and payments to prevent eviction from or foreclosure on your primary residence.

Navigating the rules of 403(b) plans can be complex, but understanding these guidelines is crucial to maximize your retirement savings and avoid unnecessary penalties. While it may be tempting to access these funds early, the potential financial consequences should be carefully considered. It's recommended to seek professional financial advice to ensure your retirement planning strategy aligns with your long-term financial goals. Remember, a well-informed investor is a successful investor.

 

Summary

403(b)s have essentially the same distribution rules as 401(k)s. The advice given for 401(k) accounts still applies here: taking money out of a retirement account before retirement is strongly discouraged.

You may withdraw your money penalty-free at age 59½, and you must begin taking annual withdrawals that satisfy RMD requirements on April 1st of the year you turn 70½. If you withdraw money before age 59½, you will be subject to a 10% penalty in addition to regular income taxes.

To learn about the exceptions to the early withdrawal penalty, see “What are hardship withdrawals from my 401(k)?

Rules for hardship withdrawals are the same for 401(k) accounts and 403(b) accounts 403(b)s at government-funded organizations (public schools and hospitals) and private sector 403(b) plans funded solely by employee elective deferrals are non-ERISA plans, and the plan cannot impose their discretionary standards to define what constitutes a hardship withdrawal.

A third-party company must be contracted by the custodian or vendor to handle those requests as well as loans and other distributions for the plan to keep its non-ERISA status. A plan which is subject to ERISA costs more to maintain due to auditing and reporting requirements.

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Disclaimers and Limitations

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