When the Rules Allow You to Take Money from a 403(b) While Working

Remember, 403(b) accounts are designed for retirement. So taking money out early is very limited. Here are the main scenarios when the rules allow pre-retirement 403(b) withdrawals:

• You’ve Reached Age 59 1/2

  Good news! Once you turn 59 1/2, you can start taking money from your 403(b) any time you want for any reason. IRS rules call this an “age 59 1/2 withdrawal.”

  So if you’ve hit this milestone birthday, you don’t have to be retired to access your 403(b) money.

• You No Longer Work for Your Employer

  Say you leave or lose your job, or switch employers. In that case, you’re allowed to take money from the 403(b) you had through that employer.

  You may still owe taxes and penalties on early withdrawals though. More on that shortly.

• You Have a Financial Emergency

  If you have a very urgent financial need, you may qualify for what’s called a “hardship withdrawal” from your 403(b). To do so, you must prove one of the IRS-approved financial hardships, like:

  • Unpaid medical bills
  • Preventing eviction or foreclosure
  • Paying for a loved one’s funeral
  • Covering damage from a natural disaster

  And the withdrawal is limited to the amount you specifically need for that emergency. The rules are strict!

• You’re Disabled

  Here’s some brighter news – if you become disabled, IRS rules allow you to take penalty-free 403(b) withdrawals at any age.

  You’ll still owe income tax on the money, but you avoid the early withdrawal penalties.

The Penalties and Taxes You’ll Owe for Early 403(b) Withdrawals

Beyond the specific situations we just covered, taking 403(b) money before 59 1/2 or while still employed triggers big penalties and taxes:

• You’ll owe income tax on the full withdrawal amount. Pre-retirement withdrawals don’t get the tax deferral.
• You also may face a 10% “early withdrawal penalty” tax on top of those income taxes. Ouch!
• Typically, you can only withdraw the funds you contributed, not any employer match or investment growth.
• You may have to prove financial hardship to make a withdrawal. The documentation requirements are strict.
• Withdrawals must be paid directly to you – no transferring the money elsewhere.
• Most plans only allow one withdrawal per 12-month period, up to a maximum amount.
• After a hardship withdrawal, you may be blocked from contributing for 6 months.

Should You Take Money from Your 403(b) Before Retirement?

Given those nasty penalties, should you tap into 403(b) funds while still working?

In most cases, the answer is no – avoid early withdrawals if humanly possible! Here’s why it can seriously damage your retirement finances:

• You shrink your retirement savings, leaving less to grow.
• You lose all the tax-deferred compound growth on withdrawn funds.
• Those taxes and penalties typically destroy 20-30% of withdrawals or more.
• Reduced 403(b) contributions later play catch up from lost savings.

However, some rare times an early withdrawal does make sense:

• You have an urgent financial crisis and literally no other options.
• You’ve run the numbers and your retirement savings can withstand the hit.
• You’ve explored every single possible alternative and still have no other choice.

But overall, I urge you to see early 403(b) withdrawals as an absolute last-ditch resort only. They put your later retirement security at huge risk!

Smart Alternatives to Consider Before Taking Money from Your 403(b)

Before withdrawing from your 403(b), please explore these options first:

• Borrow from Yourself Instead

  See if you’re allowed to borrow against your 403(b). Then you can pay yourself back with interest and avoid taxes or penalties. Make sure your plan permits loans!

• Find Lower Interest Debt Options

  Compare rates on all your debts. Refinancing or consolidating debts can give you needed cash without tapping retirement savings.

• Request Payment Plans

  Ask creditors if they offer extended payment plans for large medical bills, tuition, taxes, etc. Many will work with you on longer-term structured payments.

• Review Spending and Cut Any Fat

  Take a very close look at your budget to identify lifestyle cuts that could add up to big monthly savings. Try that before retirement account withdrawals.

• Explore Adding Income Streams

  Can you monetize a hobby, rent out a room, take side jobs, freelance in the evenings, etc? Boosting income may provide the funds you need.