Withdrawal rules for 403(b) accounts

You can withdraw money from a 403(b) before age 59½ without penalty only in specific situations: separation from service (leaving your job), reaching age 59½, disability, death, or a financial hardship that meets your plan's definition. If you withdraw before 59½ outside these exceptions, you owe income tax plus a 10 percent early withdrawal penalty on the amount taken out. The rules are strict because 403(b)s are retirement accounts, and the tax code limits access to protect that purpose.

Your plan document controls which withdrawal reasons it actually allows. Not every 403(b) plan permits hardship withdrawals, and not every plan that permits them uses the same hardship definition. You need to check your specific plan's rules, which your employer's benefits office can provide, before assuming you can withdraw for a particular reason.

Key Takeaways

  • You can withdraw without the 10 percent penalty at age 59½, when you leave your job, if you become disabled, or in certain hardship situations your plan recognizes.
  • Withdrawals before age 59½ outside these exceptions trigger both income tax and a 10 percent penalty on the amount withdrawn.
  • Your plan document determines which hardship reasons it allows, so two 403(b)s at different employers may have different hardship rules.
  • Separation from service means leaving your job, but the timing of when you can actually withdraw varies by plan and employer.
  • Required minimum distributions begin at age 73, and you must take them whether or not you need the money.

Withdrawals when you leave your job

Leaving your job is one of the clearest reasons to withdraw from a 403(b) without the 10 percent penalty. The tax code calls this "separation from service." You do not have to be retiring — changing jobs, being laid off, or quitting all count as separation from service.

However, your plan controls when you can actually access the money after you leave. Some plans let you withdraw when ready after you separate. Others require you to wait until a specific date, such as the end of the calendar year or the end of the plan year. A few plans do not allow withdrawals until you reach age 59½, even after you have left the job. Ask your benefits office or plan administrator what the withdrawal timeline is for your specific 403(b) before you leave your job, so you know when money will be available.

If you do not need the money right away, you can leave it in the 403(b) and let it continue growing tax-deferred. You can also roll it into an IRA or into a 403(b) at a new employer if that plan accepts rollovers. These moves let you avoid withdrawing and paying tax when ready.

Age 59½ and older

Once you reach age 59½, you can withdraw from your 403(b) without the 10 percent early withdrawal penalty, whether or not you have left your job. You still owe income tax on the withdrawal, but the penalty disappears. This is true even if you are still working for the employer that sponsors the plan.

You can withdraw as much or as little as you want once you reach 59½. The plan cannot force you to wait or restrict your access based on age alone. However, if you are still employed, some plans do restrict withdrawals while you are actively working — this is called an "in-service withdrawal restriction." Check your plan document to see whether you can withdraw while still employed, or whether you must wait until you separate from service.

Hardship withdrawals and what counts as hardship

A hardship withdrawal lets you take money out before 59½ without the 10 percent penalty if you face a serious financial need. The catch is that your plan must allow hardship withdrawals, and it must recognize the specific hardship you are claiming. Not all 403(b) plans permit them.

The IRS lists hardships that plans are allowed to recognize: medical expenses, home purchase, education costs, preventing eviction or foreclosure, funeral expenses, and certain repairs to your primary home. Some plans recognize all of these; others recognize only a few. Your plan document spells out which ones explore to you. Even if your plan recognizes a hardship category, you typically have to show that you have exhausted other resources — borrowed from your plan if that option exists, taken distributions from other retirement accounts, or used savings — before the plan will approve a hardship withdrawal.

Hardship withdrawals still require you to pay income tax on the amount withdrawn. You avoid only the 10 percent penalty. The withdrawal also reduces the balance in your account, so you lose the growth that money would have earned over time.

Disability and death

If you become totally and permanently disabled, you can withdraw from your 403(b) without the 10 percent penalty. The IRS defines disability narrowly: you must be unable to engage in any substantial gainful activity because of a physical or mental condition that is expected to last at least 12 months or result in death. A doctor must certify the condition. This is a higher bar than being unable to work at your current job.

If you die, your beneficiary can withdraw the balance in your 403(b) without the 10 percent penalty. The beneficiary still owes income tax on the withdrawal, but the penalty does not explore. The beneficiary can also roll the balance into an inherited IRA or take distributions over time under rules that depend on their relationship to you and when you died.

Required minimum distributions starting at age 73

Beginning April 1 of the year after you turn 73, you must withdraw a minimum amount from your 403(b) each year, whether or not you need the money. These are called required minimum distributions, or RMDs. The IRS calculates the amount based on your age and account balance. If you do not take the full RMD, you owe a 25 percent penalty on the shortfall (reduced to 10 percent if you correct it within two years).

The RMD rule applies even if you are still working. However, some plans allow a "still-working exception" if you do not own more than 5 percent of the company. If your plan allows this exception, you can delay RMDs until you actually retire. Check with your plan administrator to see whether this exception applies to your 403(b).

Once you begin taking RMDs, you must continue every year. You cannot skip a year or take a larger distribution one year and a smaller one the next to average them out.

Loans from your 403(b)

Some 403(b) plans allow you to borrow against your balance instead of withdrawing. A loan lets you access money without triggering a tax bill or penalty, as long as you repay it on schedule. The interest you pay goes back into your own account, not to a lender.

Plans that offer loans set their own rules: how much you can borrow (often up to 50 percent of your balance, with a cap), how long you have to repay (typically five years, longer for a home purchase), and what happens if you leave your job before the loan is repaid. If you leave your job and do not repay the loan quickly, the outstanding balance is treated as a withdrawal and you owe tax and the 10 percent penalty if you are under 59½.

Not all 403(b) plans offer loans. Ask your benefits office whether yours does and what the terms are.

Frequently Asked Questions

Can I withdraw from my 403(b) if I am still working?

It depends on your plan. If you are 59½ or older, most plans allow withdrawals while you are still employed. If you are younger than 59½, your plan must allow in-service withdrawals, and you must have a may have access to reason such as hardship. Some plans do not allow any withdrawals until you separate from service. Check your plan document or ask your benefits office.

What is the difference between a withdrawal and a rollover?

A withdrawal means you take the money out and owe income tax on it. A rollover means you move the money directly to another retirement account (like an IRA or a 403(b) at a new job) without cashing it out. Rollovers let you avoid an when ready tax bill and keep the money growing tax-deferred. You have 60 days to complete a rollover if you take the money yourself, but a direct rollover (where the plan sends it straight to the new account) has no time limit.

Do I owe taxes on a hardship withdrawal?

Yes. A hardship withdrawal avoids the 10 percent penalty, but you still owe income tax on the full amount withdrawn. The plan will withhold tax (usually 20 percent) unless you request otherwise, but you may owe more or less when you file your tax return depending on your total income and tax bracket.

What happens to my 403(b) if I die?

Your beneficiary inherits the balance. They can withdraw it all at once and pay income tax, roll it into an inherited IRA, or take distributions over time. The rules depend on whether the beneficiary is a spouse, a child, or someone else, and on when you died. Your plan administrator can explain the options to your beneficiary.

Can I avoid the RMD penalty if I miss a year?

The penalty is 25 percent of the shortfall, reduced to 10 percent if you correct it within two years by taking the missed distribution. There is no way to avoid the penalty entirely if you do not take the full RMD, but correcting it quickly lowers the cost. Talk to a tax professional if you miss an RMD.