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403(b) Retirement Plan Withdrawal Rules and Strategies


A 403(b) plan is a tax-advantaged retirement account that is specifically for public school employees and employees of some charities. Just like with a 401(k), both you and your employer can contribute to a 403(b). And in general, you can’t access the money until you are either approaching retirement age or legally disabled, and you have to start taking minimum required distributions at age 72. And, as with all retirement accounts, if you have the option to leave your money invested longer it would be wise to do so. Here’s what you should know. 

A financial advisor can help you create a withdrawal strategy to mitigate your tax liability in retirement.

What Is a 403(b) Plan?

A 403(b) is a tax-advantaged retirement account for public schools, public universities, some churches and some 501(c)(3) charities.

During your working life, you can contribute to your 403(b) portfolio and can deduct the value of those contributions from your income taxes. Your employer may also contribute to your 403(b), typically through matching contributions, and also gets a tax benefit for doing so. The plan is managed by an administrator selected by your employer, who will select the plan’s investments and overall strategy. 

In some circumstances, an employer may offer a Roth 403(b) instead of or in addition to a traditional account. In this case, the plan will be a post-tax retirement account. This means that while you’d have to contribute post-tax dollars to start, your withdrawals in retirement would be tax-free.

A 403(b) has the same annual contribution caps as a 401(k): In 2023, the employee can contribute up to $22,500. 

What Are 403(b) Withdrawal Rules?

As with all tax-advantaged retirement accounts, you cannot take distributions from a 403(b) until you either turn 59 1/2 years old or become legally disabled, though there are a few exceptions.

The IRS also allows you to take penalty-free distributions if you leave your job during the year you turn 55 or later. Note that this means you can be 54 at the time, as long as you turn 55 later that year.

Your heirs can take distributions from this account without penalty, and under certain circumstances you can take a penalty-free distribution for financial hardship or medical bills.

If you take a disallowed withdrawal from your 403(b), the IRS will add a 10% tax penalty on top of all other applicable taxes.

When you make a withdrawal from your 403(b), allowed or otherwise, you are taxed at ordinary income tax rates. This is true regardless of the nature of the underlying investments. If you have a Roth 403(b), you do not pay taxes on your withdrawals at all. 

You can roll your 403(b) over into another tax-advantaged retirement account such as an IRA or Roth IRA. In this case your taxes will be based on the account that you are rolling into. Generally, if you transfer into another pre-tax account, you will not trigger a tax event. If you transfer into a post-tax account, you must pay income taxes on the account’s total contributions.

Talk to a financial advisor today to build an income plan for retirement.

You must begin taking required minimum distributions from your 403(b) account starting at age 72. This is calculated based on the same life expectancy tables as 401(k) RMDs.

What Is a Good 403(b) Strategy?

A 403(b) account operates very much like a 401(k), an IRA or any other pre-tax retirement account. When it comes to taking your distributions, this gives it a couple of key advantages and disadvantages. 

Arguably the biggest advantage to your 403(b) will be its scope. For many people, an employer-sponsored retirement account is their largest portfolio and their longest-standing one. By the time of retirement, the portfolio will have entered its era of maximum gains.

Perhaps the biggest disadvantage to your 403(b) is its tax status in retirement. You will pay standard income taxes on your withdrawals from this account, rather than the preferred capital gains that you might pay from a taxed portfolio. 

Beyond that, the best strategy will depend on your personal situation. However there are a few key things to consider:


First, can you do a Roth IRA rollover? 

For most individuals, a Roth IRA is one of best tax-advantaged retirement accounts available. While you must pay a large tax bill up front, the account can then accrue gains completely tax free. Since (ideally) most of your account’s value will come from those returns and growth, this tradeoff can work overwhelmingly to your advantage.  

Delayed Withdrawals

For retirees, one of the most important questions is how to structure their withdrawals. In general, it’s best to delay taking distributions from your most valuable retirement accounts so that they can continue to grow for longer. 

This approach will depend on your overall retirement profile, including Social Security and other assets. However in the likely event that your 403(b) is your most valuable retirement account, it’s often best to delay taking distributions from it if possible. 

A financial advisor can help you establish an appropriate portfolio and withdrawal strategy.

Annuitization vs. Market Assets

Annuities have become a popular investment option for retirees, given that they often provide a strong middle ground between the high stability (but low returns) of bonds and the high returns (but low stability) of the stock market. As a result, it’s common for retirees to structure much of their 403(b) around an annuity.

The one thing to consider is how much of your portfolio to put into an annuity. While the guaranteed income is an excellent feature of this asset, the fixed income will gradually lose value against inflation and (especially) housing costs. Make sure to build in capacity for growth as well as security.

Bottom Line

A 403(b) is the nonprofit equivalent of a 401(k) account, giving you access to a pre-tax retirement account that your employer can contribute to. How you use and structure this account will depend on your personal needs and financial situation.

Retirement Account Tips

  • A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now
  • If you want to know whether you’re on track for reaching your retirement savings goals, SmartAsset’s free 401(k) calculator can help you get an estimate.

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