How Does a 403(b) Work When You Retire?

You have worked hard for years, but you may be uncertain about what to do with your 403(b) after you leave your job. If you are at or near retirement and you have been saving money in your 403(b) plan during that time, you can have several options.

Retirement is a major life milestone, and knowing the paths that you can take with your retirement savings can have a big impact on the quality of life you can enjoy after you stop working. Here is a breakdown of the different choices of what you can do with your 403(b) after you have left a full-time career, and how each of these options work.

As you go over your 403(b) retirement options, a good thing to think about is how, in retirement, you will replace the income that you brought home from your career. Your retirement savings inside your 403(b), and probably money inside other accounts, will come into play here.

What Is a 403(b) Plan?

Before we delve into your different options for retirement, let’s quickly cover what a 403(b) plan is. Simply put, a 403(b) is a type of retirement savings plan that lets you accumulate money on a tax-advantaged basis.

Just as with a 401(k) plan, employers offer it as a vehicle for their employees to build savings for retirement. However, 403(b) plans are typically offered by certain non-profit organizations or government employers.

Public schools, universities, hospitals, 501(3) non-profits, or religious groups are common workplaces that provide a 403(b) retirement savings plan. This plan lets you contribute part of your paychecks toward your retirement. Your employer may offer some sort of match on your contributions as well, but not all employers do.

Since it’s a tax-advantaged plan, a 403(b) lets you contribute money for retirement on a tax-deferred basis. In other words, your contributions reduce your taxable income for each year that you put money away. The IRS tax code has set limits on how much money can be contributed each year.

Since a 403(b) is tax-deferred, your money grows without taxes while it’s inside the account. Where you are taxed is on the backend, when you take withdrawals from your 403(b) account. The plan is set up this way so people have incentive to save for their retirement years.

If future taxes are of concern to you, some 403(b) plans also come with Roth account options. If you go that route, your contributions to your Roth 403(b) account will be taxable. However, the money will grow tax-free inside the account, and your withdrawals will be tax-free on the backend as well.

Important Milestones That Can Affect You

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    Since you have a 403(b) plan, you may be familiar with how there is generally a 10% penalty for withdrawing any money before you reach age 59.5. These withdrawals are subject to the penalty along with income taxes due.

    Once you reach 59.5, you can take withdrawals without the penalty. That being said, there is an exception to this rule that applies to those who aren’t yet retired.

    It’s called the Rule of 55, and it allows those who are 55 and older to withdraw money from their 403(b) without a tax penalty, as long as certain conditions are met.

    If you are between the ages of 55 and 59.5 and get laid off, are fired, or quit your job, then you can pull money out of your 403(b) account without penalty. The Rule of 55 applies to those who leave their jobs at any point during or after the year in which they turn 55.

    However, this rule applies only to money inside your current 403(b) plan. This is the plan that you invested in while you were employed in the job that you leave at age 55 or older. The rule doesn’t work for old retirement plans at former jobs. Instead, the Rule of 59.5 would apply for those savings.

    No decision of what to do with your money should be made without very careful thought of all the pros, cons, and consequences of each option. You might consider seeking help from an experienced financial professional who acts in your interest and can bring an impartial perspective.

    Also, keep in mind that income taxes will be due on withdrawals. You also can’t keep money inside your 403(b) forever and avoid taxes. Required minimim distributions will apply once you reach your 70s.

    How Does Your 403(b) Work at Retirement?

    As you near these age milestones above or just retirement in general, you may have a variety of options for the assets inside your 403(b) plan:

    • Keeping the money where it is
    • Moving your money over into another account like an IRA
    • Making withdrawals periodically from your account
    • Taking a lump-sum distribution of your money

    Option #1 – Keep Your Money Where It Is

    The first option is to simply keep your savings in your 403(b) retirement plan. The mutual funds and other investment options in these plans can vary widely in terms of fees and selections alone.

    If you are happy with how your money has done, you might simply choose to keep it where it is. However, you will face withdrawal requirements in the future via required minimum distributions if you do go this route.

    Option #2 – Move Your Money Over Into Another Account

    If you would like to explore what you think might be better alternatives outside of what your plan offers, then you can roll it over into another account, like a traditional IRA. This can let you move your money into an account that is managed by your financial professional, if you are working with one.

    Ask your financial professional about how you can transfer or roll this money over without tax hits. It’s important for you to have this done right. It’s also prudent to evaluate this option in terms of potential negatives and determine if the positives outweigh them before deciding to move forward.

    Should you worry about taxes on your money, another option is a Roth conversion on your 403(b) plan assets. You could move your money into a Roth IRA and pay the tax man upfront. In return, this might help you reduce taxes on your retirement income in the future.

    Be sure to confer with an experienced tax advisor about the pros and cons of this route. You might also talk with your tax advisor and financial professional about making this conversion over time. That can help you keep the tax man at bay while making your overall tax liability for each year more manageable.

    Option #3 – Take a Total Distribution from Your Plan

    This option is considered by most financial professionals to be the worst thing you can do with your retirement funds.

    Most of them would say that this should generally only be done as a means of last resort. For example, you might be in a dire financial emergency, need a large chunk of money immediately, and have no other options.

    This can easily result in a larger tax bill than you would have. A distribution of this size will often land you in a (much) higher tax bracket.

    Option #4 – Make Periodic Withdrawals from Your 403(b) Account

    Of course, you can also choose to keep your money inside the 403(b) account and take money out from it in periodic withdrawals. This can be as you need the income or as a supplement to other income streams that you are receiving.

    There are a few things that are good to know about this option. Sometimes funds inside a 403(b) account can take time to withdraw, as you will usually need approval from your 403(b) plan’s third-party administrator for access.

    No matter what tax bracket you fall in, many 403(b) plans also have mandatory 20% tax withholdings on cash withdrawals. You might also have fewer options in general. The point? There are pros and cons to every financial decision that can possibly be made.

    As mentioned earlier, you can withdraw money penalty-free from your 403(b) when you are 59.5 – or 55 years old if you plan on taking early retirement.

    Many teachers, many government employees, and some other employees will receive a pension of some sort after they retire. Some school systems also have their teachers pay into Social Security so that they can get income from that source as well.

    But in some cases, the pension payouts plus Social Security benefits will not equal 100% of your salary when you retire. This is where your 403(b) plan distributions come in.

    You can structure your withdrawals to cover the gap between your guaranteed sources of income and your living expenses. Regardless of how much you might need for monthly income, you probably don’t want to take a chance on running out of money.

    How Much Income Will You Need for Retirement?

    It’s a good idea to consult with a financial professional. They can help you see how much income you can receive from your retirement savings each year without depleting your money too quickly.

    If you are nervous about running out of money too soon, then you may want to consider an annuity as part of your retirement strategy. Annuities will pay you a stream of income that is guaranteed to last for your entire life, even if you completely deplete all of the money in the contract.

     They are designed to protect you against outliving your income. Besides Social Security, annuities are the only financial vehicle on the planet that can do this for you.

    How Do Annuities Work?

    There are many different types of annuities available in the marketplace today. Here’s a quick rundown of how they work.

    Fixed Annuities

    Fixed annuities will provide guaranteed protection of the money put into them, and they will also pay you a guaranteed interest rate. But the interest rates on this annuity tend to be the lowest among any type of annuity right now.

    Variable Annuities

    Variable annuities invest your money in a selection of funds, called mutual fund subaccounts. Your money can go up and down in value depending on what the financial markets they are in do.

    You might have owned a variable annuity if you are working in a public education system or have a friend who has owned one. This annuity carries the most risk of all annuity types, but it also has the most growth potential of them all.

    Fixed Index Annuities

    Another annuity is a fixed indexed annuity. It also guarantees your principal. This annuity doesn’t provide guaranteed growth like fixed annuities do, but it usually has more growth potential.

    Indexed annuities are linked to an underlying benchmark index, and you might have heard of some, such as the S&P 500 price index. When the index goes up, a proportionate amount of interest is credited to the contract.

    When the index goes down, the annuity simply earns nothing for that period. It’s credited zero percent. What’s more, once these interest earnings have been credited to your fixed index annuity, they are locked in. As a result, your original money and your interest earnings are protected.

    No matter what annuity you choose, all types of annuities can pay you a guaranteed income for as long as you may need it.  

    Planning for Your Future Retirement

    If you are still working, you have a 403(b) plan, and you are at or near retirement, you will have some choices regarding your 403(b) plan and how you want to use it going forward.

    You may need to enlist the help of a knowledgeable financial professional to do this. They can help you look at your complete financial picture, understand your 403(b) and other retirement benefits that you may have, and make confident and informed financial decisions.

    Depending on your situation, risk tolerance, and goals, they can help you create a plan with what you have to achieve your objectives with a minimum of risk. Talk to your financial professional for more information on 403(b) plan options in retirement and how you can decide what is right for you.

    Are you looking for a financial professional to help guide you and walk you through these what-ifs? Many independent financial professionals are available at to serve you.

    Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, please call us at 877.476.9723.

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