You’ve contributed to your 403(b) plan faithfully for a number of years. You’re about to retire. Now what? How (or if) you should withdraw that money depends on a number of factors and options that are available to you.
Key Takeaways
- A 403(b) plan doesn't require you to take distributions when you retire.
- You may owe a penalty and income taxes on your withdrawals if you retire before 55.
- You may owe taxes on any lump sum withdrawals in the year in which you withdraw the funds if you retire after 55.
- You must start taking annual required minimum distributions soon after you turn 73 as of Jan. 1, 2023, or at 72 if you turned that age before that date.
- Annuitizing all or part of your 403(b) when you retire provides you with income for life as well as a designated beneficiary with funds after your death.
- Consider rolling over all or part of your 403(b) into another account like a 401(k) or a traditional or Roth IRA to benefit from varied investment options during retirement.
Types of 403(b) Plans
Your 403(b) plan is either a tax-sheltered deferred annuity from an insurance company, a custodial account at a brokerage invested in mutual funds,or an account that allows you to invest in either of these options.
Your contributions were likely made on a pretax basis like those to a 401(k) plan. Some 403(b) plans offer the option to make what is called a designated Roth contribution with after-tax dollars.
The Basic Rules
First of all, you are not required to take everything out of your 403(b) account when you retire. In fact, you don't have to take out any funds from the account at all when you leave the workforce. If you leave funds in your 403(b) account, they will continue to grow until you withdraw them, annuitize them, or roll them over later.
Retiring Before 55
If you retire before the age of 55 and you do plan to make withdrawals, you will have to pay regular income taxes plus a 10% penalty on the amount, unless you agree to substantially equal periodic payments (SEPP) for at least five years or until you reach the age of 59½—whichever is later.
The size of those payments will be based on your expected lifespan.This applies to the conventional 403(b) plan; with the Roth version, you don't pay income tax, since the contributions were made with net (post-tax) income. However, the penalty will still apply.
Retiring at 55 or Older
If you are 55 or older when you retire, you can choose to withdraw some or all of your funds in a lump sum. However, any amount you withdraw does not qualify as a lump-sum distribution under the 10-yeartax option, according to the Internal Revenue Service (IRS)
This means you cannot spread your tax liability over a decade but must pay all the income taxes due on the amount the year you withdraw the funds. Bear in mind that if the withdrawal is sizable, it couldmove you into a higher tax bracket.
Required Minimum Distributions (RMDs)
As of Jan. 1, 2023, you have to start withdrawing funds from your retirement account when you turn 73. These withdrawals are known as required minimum distributions (RMDs). This rule came into effect with the passage of the SECURE Act 2.0 in December 2022. That rule doesn't apply to account holders who were 72 before that date, which was the age established by the SECURE Act of 2019, which increased the age up from 70½.
You must continue to take these RMDs each year. Based on your age and the age of your spouse (if you're married), they gradually increase with the passing years.
Most plan administrators provide for the automatic calculation and distribution of RMDs annually, but basically, they're determined by dividing the prior year-end value of the retirement account by a distribution period from one of thelife expectancy tables from the IRS. If you fail to take the correct distribution one year, you will be subject to a 25% nondeductible excise tax, which can be potentially reduced to 10% if the RMD is corrected within two years.
As of Jan. 1, 2023, you must start taking annual required minimum distributions (RMDs) by the first of April the year after you turn 73. For example, if you turn 73 in 2024, you must take your first RMD by April 1, 2025. This doesn't apply to anyone who was born in 1950 or earlier. (In that case, you would have had to start taking RMDs at age 72.)
The Annuity Option
No matter what type of 403(b) plan you have, you may wish to annuitize some or all of it when you retire. By arranging to receive periodic, fixed payouts, you provide yourself with a guaranteed income stream for life (or some period).
Most experts warn against annuitizing the entire balance in your retirement plan, especially if you already receive a defined benefitpension. If you have a pension, it means part of your retirement income is already in annuity form, so to speak, so you might want to retain flexibility with your other assets.
Your annuity doesn't have to stop when you die. You can bequeath it to someone else.Depending on the options you choose, the beneficiary may be subject to a gift tax upon your death. If, however, it’s a joint and survivor annuity, where only you and your spouse have the right to receive payments, the annuity will likely qualify for the unlimited marital deduction, according to the IRS, which would make the funds tax-free.
Most experts discourage annuitizing all of the funds in a 403(b) account to allow an investor to realize higher overall investment returns.
The Rollover Option
You may wish to roll over part (or all) of your 403(b) plan into another tax-advantaged account, such as a:
- 401(k) (at another employer)
- Traditional individual retirement account (IRA)
- Roth IRA
- Corporate 403(a) annuity-based plan
- Government-sponsored 457 plan
You might do a rollover to have more ready access to your funds, or to have different and more varied investment options.
There are rules regarding what you may or may not roll over. In general, you must roll over distribution amounts received within 60 days in order for the amount to be treated as non-taxable. You may not roll over RMDs or any of those substantially equalperiodic payments if you retire before age 55. You can roll 403(b) funds into a Roth IRA only if the account has the same restrictions that a rollover from a traditional IRA has. For more on rollover options, see IRS Publication 571 and IRS Publication 590.
If you are a retired public safety officer, such as a police officer, firefighter, chaplain, or ambulance crew member, you have an extra perk: You can withdraw up to $3,000 from your 403(b) plan and use it to pay for any accident, health, or long-term care insurance. If it goes directly to pay the premiums, that withdrawal will not be included in your taxable income. IRS Publication 575 offers more details.
At What Age Is a 403(b) Withdrawal Tax Free?
When you turn 59½ years old, you can start taking distributions without penalty. However, unless you have a designated Roth account, your 403(b) retirement account withdrawals will be taxed as regular income, at your current tax bracket.
Is a 403(b) Taxed After Retirement?
Yes, when you withdraw money from your 403(b) when you retire, you will pay income tax on the distributions. The exception is if you have a Roth account: these withdrawals are tax free, because you paid taxes on Roth contributions up front.
Can I Take a Loan From My 403(b)?
Sometimes. Just like some 401(k)s, some 403(b) plans offer the option to take out a loan, up to 50% of your vested balance or $50,000, whichever is less. There is an exception to this rule, though plans are under no obligation to offer it: if 50% of the vested balance is less than $10,000, then you may borrow up to $10,000. Check with your plan.
How Much Can I Withdraw From My 403(b) After Retirement?
This depends on the plan, so read the fine print. Some plans offer the option to withdraw in a lump sum. Another option is a rollover to an IRA or another retirement plan, like a 401(k), to avoid fees that accompany 403(b)s. If you roll over your standard 403(b) funds into a Roth account, you'll need to pay taxes on those funds right away—but when you do eventually withdraw those funds from the designated Roth account, you'll do so tax-free.
The Bottom Line
Many 403(b) plan owners choose a portfolio that combines annuities and investments, because this mix provides a steady income stream as well as the ability to achieve some capital appreciation.
To begin any sort of withdrawal or transfer process, simply contact your plan sponsor and indicate how much you wish to withdraw. There will be paperwork. Often, the sponsor will withhold a portion of that amount for taxes (typically 20%), so be sure to account for that when making your request.
