403(b) Plan: Distributions
When You Can Start Taking Distributions
You can start taking 403(b) plan distributions once you reach age 59½. You can also take distributions if you sever from your employer, if your employer terminates the plan or if you become disabled. You can take distributions of your elective deferrals if you experience a qualified financial hardship. If you’re a qualified military reservist called to active duty, you may be eligible to take early distributions without penalty. And if you die before age 59½, your estate or beneficiaries can take distributions. Any of these events that allow you to take distributions without penalty are called triggering events.
When You Must Start Taking Distributions
As a 403(b) plan participant, you must take annual required minimum distributions (RMDs) starting by April 1 after the calendar year when you turn 70½. For example, if you turn 70 on July 26, 2016, and reach age 70½ on January 26, 2017, you have until April 1, 2018, to take your first RMD. Some plans allow participants to postpone RMDs until April 1 of the year after they retire, even if they retire after age 70½. (Related: Avoiding Mistakes In Required Minimum Distributions (RMD)
Minimums are based on the account balance and your life expectancy as defined by the IRS’s Uniform Lifetime Tables. You are allowed to withdraw more than the minimum.
If you don’t take these distributions, you must pay a 50% tax on the difference between the amount you were required to take out and the amount you actually took out. This tax is called an excess accumulation penalty.
Taxes on Distributions
Distributions are fully taxable at ordinary income tax rates, unless they are Roth distributions, which are not taxable. However, if you’re a retired public safety officer such as a firefighter, police officer, chaplain, or ambulance worker, you can take up to $3,000 in distributions tax free to pay accident, health or long-term care insurance premiums for yourself and your immediate family.
If you take distributions before you reach age 59½ and your circumstances aren’t one of the triggering events described above, you’ll usually have to pay a 10% federal tax penalty on the amount you take out, in addition to the ordinary income tax you would pay on your distribution under any circumstance. And your state may impose additional tax penalties. But there are a few exceptions:
- You’re at least 55 when you separate from service.
- You retire before age 55 and take substantially equal periodic payments following IRS rules.
- You separate from service and move the money to another retirement account.
- You get divorced and the court orders a division of your 403(b) assets with your former spouse.
- Your medical expenses exceed 7.5% of your adjusted gross income.
Your plan may also allow you to borrow from your 403(b). You can borrow up to $50,000 or half of your account’s value, whichever is less. You must repay the loan with interest.