How Does a 403(b) Plan Pay Out?

403(b) plans provide tax-deferred retirement savings for employees of nonprofit organizations and educational institutions. They are similar to 401(k) plans offered by private employers, but have slightly different withdrawal rules. You may defer part of your salary into the plan each pay period before any federal or state taxes are withheld. When you begin withdrawing money from your account, you will be taxed at the ordinary income rate. If you take money out of a 403(b) plan before reaching age 59 1/2, you must also pay a 10 percent early withdrawal penalty.

Retirement Eligibility

You can choose to receive a lump-sum distribution or roll the money over to another plan if you are at least 55 years old when you retire from the company. If you retire before age 55, you are eligible to receive substantially equal periodic payments. The payments will be spread out over the remainder of your expected lifespan. This payment arrangement must continue for five years or until you reach age 59 1/2, whichever is longer.

Minimum Required Distributions

Starting at age 70 1/2, you must begin taking a minimum required distribution each year. These payments are taxed as ordinary income. The amount of your required distribution is calculated based on your age and the age of your spouse. If you do not take the correct distribution for the year, you must pay a 50 percent non-deductible excise tax.

Rollovers

You can roll your 403(b) payout into an individual retirement account to avoid paying taxes or early withdrawal penalties in the current tax year. However, you are not permitted to roll over minimum required distributions or substantially equal periodic payments from an early retirement. You can only roll funds into a Roth IRA if the account is subject to the same restrictions as a rollover from a traditional IRA into a Roth IRA.

Transfers

Transfers between accounts in the same 403(b) plan may trigger a tax liability even if you do not receive any cash. You may only transfer funds tax-free if the new account has the same or stricter regulations on withdrawals as your old account. The benefits provided by each account must also be equal after the transfer. If either of these criteria are not met, the amount of the transfer will be taxed as ordinary income.

Financial Hardship

Your employer may decide whether to allow hardship withdrawals in its 403(b) plan. The plan document must explicitly define the criteria for approving a hardship distribution. Some common reasons for allowing hardship withdrawals include medical expenses, college tuition, purchase of a primary residence and funeral expenses.

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