The 403(b) Basics: Accessing Your 403(b) Savings
403(b) Distribution Eligibility
If you withdraw assets prior to age 59½, the IRS will impose a 10 percent penalty tax on the amount to be included in your taxable income in addition to the normal tax consequences, unless you meet one of the following criteria:
- You separate from service during or after the year you reach age 55. This exception is permitted by §72(t)(2)(A)(v). See irs.gov for more information.
- Retire before age 55 and arrange a schedule of Substantially Equal Periodic Payments (SEPP). The payments are based on an IRS formula and must continue for 5 years or until the individual reaches age 59½, whichever takes longer. This exception is permitted by §72(t)(2)(A)(iv). See irs.gov for more information.
- Separate from service and move money to a tax-favored account such as another employers plan or a Rollover IRA
- Made to an employee for medical care to the extent you have deductible medical expenses (medical expenses that exceed 7½% of your adjusted gross income), whether or not you itemize your deductions for the year.
Borrowing Money From Your 403(b)
Subject to availability and any additional conditions applied by individual vendors. IRS limits loans to the lesser of:
- One half of account value
403(b) Hardship Withdrawals
Hardship distributions are permitted by the IRS, but are not required to be made available. Check with your vendor for details.
Withdrawal Requirements for 403(b) Money
You must begin to take withdrawals from your 403(b) no later than April 1 of the year following the year in which you turn age 70½. If you are still working, you can delay withdrawal from your 403(b) until April 1 following the year in which you retire. See this IRS story on Required Minimum Distributions (RMD).
403(b) account balances that existed on December 31, 1986 are not subject to the age 70-1/2 distribution requirement. However, any earnings on that balance are. Distribution from the 12/31/86 balance needs to start at age 75. This requirement is not found in the Internal Revenue Code, but rather in a letter ruling. Also, any distributions in excess of required distributions are deemed to reduce the 12/31/86 balance. So, if any money has been taken out of the 403(b) account other than those that are required (such as a partial withdrawal or a deemed distribution), the 12/31/86 balance may be less than anticipated. For your specific situation it's recommended that you consult a professional tax advisor.
These can be expensive, punitive and complex products. Here's what you need to know.