403(b) Distribution Rules – How They Work


Are you counting on a 403(b) plan to help you in retirement? It helps to understand your 403(b) distribution rules so that you can make the most of your money. After spending so many years building up those retirement assets, you want to make the best possible use of them.

Many public employees have a 403(b) account. In retirement planning, they find that they can retire at as much as 60 percent or so of their career income without using any individualized income planning. However, some people will prefer to have a retirement income that is more than just that.

This article will cover 403(b) distribution rules and options at a high level. The goal is to help you make more well-informed decisions about your retirement savings and your financial future. You will also learn some options to help close any income gaps between what you expect to get and what you need to cover your preferred lifestyle in retirement.

The first option – always available – is simply to keep your savings in your 403(b) retirement plan. However, the mutual funds or other investment options in these plans can vary widely in terms of fees and investment options available. If you are happy with how your money has done so far, you might choose to keep it where it is.

However, you will still face required withdrawals in the future via required minimum distributions (see below) if you choose this route. Let’s get more into the various 403(b) distribution rules now.

Read More

How Does a 403b Work When You Retire: Key Insights Explained

Despite your years of hard work, you might not know what to do with your 403b if you quit your employment. You have a few choices if you have been accumulating money in your 403b plan and are approaching or already in retirement. The question is, how does a 403b work when you retire?

Retirement is a significant life milestone. Knowing what to do with your retirement savings can significantly affect the kind of life you can lead after you leave the workforce. In this article, we’ll talk about everything you need to know about the 403b plan, including the answer to your question, “How does a 403b work when you retire?”

What Is a 403b Plan?

A 403b is a type of retirement savings plan that lets you accumulate money on a tax-advantaged basis. Similar to a 401(k) plan, employers provide it as a way for staff members to save money for retirement. On the other hand, government employers and some non-profit organizations usually provide 403b plans.

501(3) non-profits, hospitals, public schools, universities, and religious organizations are among the common employers offering 403b retirement savings plans. You can use this plan to set aside a portion of your paychecks for retirement. Although not all employers do, yours might match your contributions in some way.

A 403b allows you to make tax-deferred retirement contributions because it’s a tax-advantaged plan. In other words, every year you make contributions, your taxable income is decreased. There are annual contribution caps imposed by the IRS tax code.

Your money grows tax-free inside a 403b account because it is tax-deferred. When you withdraw money from your 403b account, taxes are deducted at the back end. People are encouraged to save for their retirement years by the way the plan is set up.

Some 403b plans also offer Roth account options if you are concerned about future taxes. Your contributions to your Roth 403b account will be taxable if you choose that course of action. On the other hand, both the account’s growth and your withdrawals will be tax-free in the back end.

Important Milestones That Can Affect You

You may be aware that, as you have a 403b plan, there is usually a 10% penalty for taking any withdrawals before the age of 59.5. The penalty and any unpaid income taxes apply to these withdrawals.

You can make withdrawals without incurring penalties once you reach 59.5. However, there is an exception to this rule that pertains to individuals who have not yet reached retirement age. The Rule of 55 permits individuals who are 55 years of age or older to take out cash from their 403b account without incurring a tax penalty, provided that specific requirements are fulfilled.

You may withdraw money from your 403b account without incurring penalties if you are between the ages of 55 and 59.5 and you are laid off, fired, or quit your employment. Those who quit their jobs before, during, or after the year they turn 55 are subject to the Rule of 55.

However, only funds that are currently included in your 403b plan are covered by this rule. When you were working at the job you left at the age of 55 or older, you invested in this plan. Old retirement plans from prior employment are not covered by the rule. Rather, those savings would be subject to the Rule of 59.5.

Remember that income taxes are also payable on withdrawals. Taxes cannot be avoided by holding money in a 403b account indefinitely. After you turn 70 years old, the required minimum distributions will take effect.

How Does a 403b Work When You Retire?

So, how does a 403b work when you retire? As you near these age milestones above or just retirement in general, you may have a variety of options for the assets inside your 403b plan.

Keep Your Money Where It Is

The first option is to simply keep your savings in your 403b retirement plan. When it comes to fees and selections alone, mutual funds and other investment options offered by these plans can differ significantly.

You may decide to simply leave your money alone if you are satisfied with its performance. If you choose this course, though, you will have to take the required minimum distributions in the future to meet withdrawal requirements.

Move Your Money Over Into Another Account

If you want to explore alternatives outside the 403b plan, you can roll it into another account, like the traditional IRA. A financial professional can help you with this.

Ask your financial professional about how you can transfer this money over without tax hits. Make sure to evaluate this option in terms of potential negatives and determine if the positives outweigh them before deciding to move forward.

If taxes are a concern for you, you also have the option to convert any assets in your 403b plan to a Roth account. You could pay the tax man up front by transferring your funds into a Roth IRA. As a result, you may be able to lower future taxes on your retirement income.

Take a Total Distribution From Your Plan

Most financial experts believe that this is the worst thing you can do with your retirement savings. The majority of them would agree that doing this ought to be reserved for extreme circumstances. For instance, you might be in a dire financial situation, need a sizable sum of money right away, and be without other options.

You might end up with a bigger tax bill than you would have otherwise. This kind of distribution typically puts you in a (much) higher tax bracket.

Make Periodic Withdrawals From Your 403b Account

Of course, you can also decide to leave your money in the 403b account and make sporadic withdrawals from it. This may be done because you require the money or to augment any other sources of income you are receiving. 

Withdrawing money from a 403b account can occasionally take some time because access to the funds typically requires permission from the third-party administrator of your 403b plan.

Many 403b plans also require mandatory 20% tax withholdings on cash withdrawals, regardless of your tax bracket. In general, you might have fewer options. The point? Every possible financial decision has advantages and disadvantages.

As previously stated, if you intend to take an early retirement, you can withdraw money from your 403b without incurring penalties at age 55. You can arrange your withdrawals to make up the difference between your living expenses and your guaranteed sources of income. 

How Much Income Will You Need for Retirement?

Now you know how a 403b works when you retire, how much income do you need to cover your living expenses during retirement? Seeking advice from a financial expert is the smartest idea. They can assist you in determining the annual income you can draw from your retirement savings without running out of money too soon.

Annuities are a good option to include in your retirement plan if you are concerned about running out of money too soon. Even if you spend all of the money in the annuity contract, you will still receive an income stream that is assured to last the duration of your life.

They’re made to keep you from earning more than you can afford. Annuities are the only financial product that can do this for you outside of Social Security. 

Planning for Your Future Retirement

So, how does a 403b work when you retire? If you are still working, you have a 403b plan, and you are at or near retirement, you have options outlined above on how you want to use your 403b plan.

financial professional can help you with the decision-making process. They can assist you in developing a plan using the resources you already have to accomplish your goals with the least amount of risk, depending on your circumstances, risk tolerance, and goals. 

Are you looking for a financial professional to help guide you with your 403b plan? Get assistance from numerous independent financial professionals at SafeMoney.com. If you would like a personal recommendation, give us a call at 8774769723.

Next Steps to Consider

  • Start a Conversation About Your Retirement What-Ifs

    retirement planning services next steps

    Start a Conversation About Your Retirement What-Ifs

    Already working with someone or thinking about getting help? Ask us about what is on your mind. Learn More

  • What Independent Guidance
    Does for You

    independent vs captive advice

    What Independent Guidance
    Does for You

    See how the crucial differences between independent and captive financial professionals add up. Learn More

  • Stories from Others
    Just Like You

    safe money working with us

    Stories from Others
    Just Like You

    Hear from others who had financial challenges, were looking for answers, and how we helped them find solutions. Learn More

Proud Member