There is a lot of uncertainty in life. You don’t know when your funds will deplete or when you need to access 403(b) funds for an emergency. The money in the 403(b) account is yours. However, you can only access and withdraw it when certain criteria are met.
As mentioned, borrowing money from 403(b) is not encouraged. Moreover, to maximize the effect of compounding and the highest tax benefits, it is recommended to avoid using 403(b) funds until you retire.
However, if you have reached a point where withdrawing is the last resort, here are the conditions you need to know to easily withdraw your money from the 403(b) account:
- You reach the age of 59.5 years, retire at 55 years of age or later, or leave the job at 55 years of age.
- In case of disability, you become eligible to withdraw 403(b) funds too.
- If you die, the beneficiaries are eligible to withdraw 403(b) funds.
- Certain account holders can withdraw funds for medical emergencies, too.
- You are eligible for withdrawal in case of financial hardship and job severance.
- You can also withdraw funds for the birth of a newborn or adoption.
Penalty Free Withdrawal Options
Up to 10% penalties can be imposed on some 403(b) withdrawals. You will have to pay a withdrawal penalty in case of financial hardship and job severance (before 55 years of age).
Moreover, if your 403(b) account is employer-contributed, it is important to understand other conditions for penalty-free withdrawals. You may also need further documentation to prove your 403(b) early withdrawal case without penalty. Moreover, check documents for withdrawal in the scenario of 59.5 years of age or birth/adoption.
Alternatives of Withdrawing From 403(b) Account
It is highly recommended to save some emergency funds before starting to invest in the retirement savings plan. This will help you in difficult situations. This liquid cash should be enough for 6 months and will significantly lower the risk of withdrawal from a retirement account.
If this is not your scenario, try to find someone from family or friends who might lend you some cash. This will also help with a short-term emergency.
The last scenario involves taking a loan from the bank or withdrawing cash from your credit card. You will have to pay interest on that, too, along with taxes. In this scenario, contact your financial advisor, who will assess all your options and plan a strategy for saving some funds.
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Required Minimum Distributions (RMDs) In 403(B) Withdrawals
RMDs are defined as minimum withdrawal per year for individuals with 403(b) accounts who reached the age of 73. These are necessary so that the government can taxes on 403(b). The RMDs varies person to person based on accumulated wealth and IRS regulations.
The Roth 403(b) is already taxed, so it has no RMDs in the account holder’s lifetime.
Can I Withdraw From 403(B) While Still Employed?
You can withdraw funds while still employed but need a valid reason. The most common reason is financial hardship withdrawal, which carries a penalty.
If you reach the age of 59.5 and are employed, withdrawal eligibility is fulfilled, and there is no penalty.
What Falls Under Financial Hardship For 403(b) Accounts?
According to the IRS, the following circumstances fall under the definition of financial need:
- Medical expenses.
- Buying the first house.
- Educational expenses of you or your dependents in the family.
- Funds for home construction/ renovation.
- Funeral expenses of you or your dependents.
Are Early Withdrawals in 403(b) Tax Exempt?
No, early withdrawals are not tax exempt. Contributions in 403(b) accounts are made using before-tax money, but withdrawals are not tax-free.
Contrary to lower taxes that apply to after-retirement withdrawals, if you withdraw money early, you will fall into a higher tax bracket. Thus, you will lose the tax benefits of 403(b) and pay higher state and federal taxes.
When Will I Pay the Penalty on the 403(b) Withdrawal?
Depending on the reason for withdrawal, a 10% penalty may be imposed. For example, a penalty is imposed for job severance or hardship withdrawal!
When Will Withdrawing Funds From 403(b) Is A Must?
Withdrawing funds is necessary after reaching a certain age. This usually happens after retirement, but the age varies for each account. It is also called the required minimum distribution.
What Will Happen To 403(b) Funds In Case of My Death?
When you die, your 403(b) savings will be transferred to beneficiaries according to your guidelines. Each beneficiary has the option to either keep funds in an account in their name or withdraw them, but this is only possible after confirmation of the account holder’s death.
How To Avoid Taxes On 403(b) Withdrawal?
You can not simply avoid taxes on your retirement savings. However, you can reduce tax by withdrawing funds while in low income tax bracket, i.e., after retirement when you don’t have active pay.
You can also spread withdrawal over several years to avoid falling into a higher tax bracket. Moreover, after reaching the age of 70, paying charities using an IRA is tax-exempt. In that case, you need to roll over your 403(b) account to an IRA first.
To get maximum tax benefits and avoid penalties on your retirement saving accounts, keep updated with tax laws and consult a tax advisor before making financial decisions!
Bottom Line – Can I Convert My 403(B) To Cash?
You can withdraw early but will have to pay higher taxes. Most importantly, in some scenarios, you will have to pay a 10% penalty as well, which will hurt overall savings the most. The priority should be an emergency fund, which you can use without help from 403(b). Taking help from family and friends is also an option. Cashing out 403(b) retirement savings should be a last resort.
