How your 403b money becomes income in retirement

When you retire, your 403b balance doesn't disappear — it stays in the account and you decide how to take it out. You can withdraw money whenever you want after you leave your job, though the IRS has rules about how much you must withdraw each year once you reach a certain age. The money you withdraw counts as taxable income for that year, and if you withdraw before age 59½, you typically owe a 10 percent early withdrawal penalty on top of income tax.

The most common approach is to take withdrawals gradually over many years, letting the remaining balance keep growing. Some people take a lump sum all at once. Others convert part of the balance to an annuity, which pays a fixed amount each month for life. Your plan administrator can explain which options your specific 403b allows.

Key Takeaways

  • Your 403b balance stays in the account after you retire and you control when and how much to withdraw.
  • Withdrawals before age 59½ usually trigger a 10 percent penalty plus income tax, unless you meet a narrow exception.
  • The IRS requires you to withdraw a minimum amount each year starting at age 73, based on your age and account balance.
  • You can take withdrawals gradually, as a lump sum, or convert the balance to monthly payments through an annuity.
  • Taxes are withheld from each withdrawal, but you may owe more or less when you file your tax return.

Early withdrawal penalties and exceptions

If you retire before age 59½, you face a 10 percent penalty on any 403b withdrawal, plus you owe income tax on the amount. That penalty is separate from the tax — it's an additional cost the IRS charges for taking money out early. For example, if you withdraw $10,000 at age 55, you pay $1,000 in penalty plus income tax on the full $10,000.

A few situations let you avoid the penalty. If you retire in the year you turn 55 or later, you can withdraw without penalty — this is called the "Rule of 55." If you become disabled, you can withdraw penalty-free. If you have substantial medical bills that exceed 7.5 percent of your adjusted gross income, you may withdraw penalty-free up to the amount of those bills. You still owe income tax in all these cases; the penalty is what you avoid.

If you leave your job and roll the 403b into an IRA, the early withdrawal rules are the same, but you have more flexibility with how you structure withdrawals. Talk to a tax professional before retiring early to understand your specific situation.

Required minimum withdrawals after age 73

Starting the year you turn 73, the IRS requires you to withdraw a minimum amount from your 403b each year. This is called a required minimum distribution, or RMD. The amount is based on your age and your account balance on December 31 of the previous year. The older you are, the larger the percentage you must withdraw.

Your plan administrator calculates the RMD and tells you the amount by October 31 each year. You must withdraw it by December 31 or face a penalty — currently 25 percent of the amount you failed to withdraw, though this can drop to 10 percent if you correct it quickly. If you're still working and your plan allows it, you may be able to delay RMDs until you actually retire, even after age 73.

If you have multiple 403bs, you calculate the RMD for each one separately, but you can withdraw the total from just one account if that's easier. The RMD rules are complex and change based on your life circumstances, so many people work with a tax professional to get this right.

Taxes on 403b withdrawals

Every dollar you withdraw from a 403b is taxable income. Your plan administrator withholds federal income tax from each withdrawal — usually 10 to 20 percent depending on what you request — but that withholding is just an estimate. When you file your tax return, you may owe more tax or get a refund depending on your total income that year and your tax bracket.

If you withdraw a large amount in a single year, you may jump into a higher tax bracket and owe more than expected. Some people spread withdrawals across multiple years to keep their income lower and their tax bill smaller. You can also choose to have extra tax withheld from each withdrawal if you want to pay more upfront and reduce the chance of owing at tax time.

State income tax may also explore to your withdrawals, depending on where you live and where your 403b plan is based. A few states don't tax retirement income, but most do. Check your state's rules or ask your plan administrator what state tax will be withheld.

Rolling a 403b into an IRA

You can move your 403b balance into a traditional IRA after you leave your job. This is called a rollover. The money moves directly from your 403b plan to the IRA — you don't touch it, so there's no tax or penalty. Rolling over gives you more control: IRAs typically offer more investment choices than 403bs, and you can manage withdrawals more flexibly.

To do a rollover, contact your 403b plan administrator and ask for a direct rollover to an IRA. You'll need to open an IRA first if you don't have one. The plan sends the money directly to the IRA custodian (usually a bank or brokerage), and you're done. The whole process usually takes one to two weeks.

If you do a rollover, the RMD rules and early withdrawal penalties still explore — rolling over doesn't change those. But an IRA may give you better options for managing the money and taking withdrawals in retirement. Some people keep their 403b where it is instead, especially if the plan has low fees or good investment options.

Annuities and may provide income

Some 403b plans let you use part or all of your balance to buy an annuity — a contract with an insurance company that pays you a fixed amount each month for life. For example, you might convert $200,000 into a monthly payment of $900 for as long as you live. The payment amount depends on your age, how much you invest, and current interest rates.

An annuity removes the risk that you'll run out of money in retirement, because the payments continue no matter how long you live. It also removes flexibility — once you buy an annuity, you can't change your mind or access the lump sum. Some annuities let your spouse continue receiving payments after you die; others end when you do. Read the contract carefully before committing.

Annuities are popular with people who want predictable income and don't want to manage investments themselves. They're less popular with people who want flexibility or who think they might need access to a large sum of money. Your plan administrator can explain what annuity options your 403b offers and connect you with an insurance company if you're interested.

What happens if you don't withdraw

You cannot straightforward leave your 403b untouched forever. Once you reach age 73, you must withdraw at least the RMD amount each year or face a steep penalty. If you're still working at the employer that sponsors the 403b, you may be able to delay RMDs until you actually retire, but once you leave the job, the clock starts.

If you leave your job and don't touch the 403b, it stays invested in whatever funds you chose. The balance can grow or shrink depending on market performance. You'll receive statements showing the balance and any earnings or losses. But you cannot avoid withdrawals indefinitely — the RMD rules will eventually require you to start taking money out.

Frequently Asked Questions

Can I withdraw my 403b before I retire?

Yes, but you'll owe a 10 percent penalty plus income tax if you're under 59½. Some plans allow "hardship withdrawals" for specific situations like medical bills or preventing eviction, but these still trigger tax and penalty. Check with your plan administrator about what your plan allows.

What if I need a large amount of money right after I retire?

You can withdraw as much as you want, but you'll owe income tax on the full amount and possibly a higher tax rate if it pushes you into a higher bracket. Consider spreading large withdrawals across two years if possible, or rolling the balance to an IRA first to explore other options like loans or penalty-free withdrawals.

Do I have to take my RMD all at once?

No. You can take the RMD in monthly, quarterly, or annual installments — the plan just needs to see the total amount withdrawn by December 31. Many people take it monthly to spread the tax impact and have steady income throughout the year.

What happens to my 403b if I die before I retire?

Your beneficiary inherits the balance. They can take it as a lump sum, roll it to an inherited IRA, or take withdrawals over time depending on the plan rules and their relationship to you. The rules changed in 2024, so check with your plan administrator about what options your beneficiary will have.

Can I move my 403b to a different investment company?

You can roll it to an IRA at a different company, which gives you access to more investment choices. You cannot move it directly to another 403b unless your new employer's plan accepts transfers, which is rare. A rollover to an IRA is the most common way to change where your money is invested.