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403(b) Distribution Rules – How They Work

admin — Wed, 04 Jan 2023 21:13:28 +0000

Are you counting on a 403(b) plan to help you in retirement? It helps to understand your 403(b) distribution rules so that you can make the most of your money. After spending so many years building up those retirement assets, you want to make the best possible use of them.

Many public employees have a 403(b) account. In retirement planning, they find that they can retire at as much as 60 percent or so of their career income without using any individualized income planning. However, some people will prefer to have a retirement income that is more than just that.

This article will cover 403(b) distribution rules and options at a high level. The goal is to help you make more well-informed decisions about your retirement savings and your financial future. You will also learn some options to help close any income gaps between what you expect to get and what you need to cover your preferred lifestyle in retirement.

The first option – always available – is simply to keep your savings in your 403(b) retirement plan. However, the mutual funds or other investment options in these plans can vary widely in terms of fees and investment options available. If you are happy with how your money has done so far, you might choose to keep it where it is.

However, you will still face required withdrawals in the future via required minimum distributions (see below) if you choose this route. Let’s get more into the various 403(b) distribution rules now.

Important Ages for 403(b) Distributions

It’s good to keep two critical ages in mind when considering 403(b) distributions.

Age 59.5

The IRS always lets you withdraw from any tax-qualified retirement account at age 59.5 or older without penalty. This age covers 401(k) plans, 403(b) plans, IRAs, and other retirement-savings accounts of pre-tax status.

Rule of 55

The Rule of 55 is an IRS policy that will allow you to take withdrawals before age 59.5 without paying a penalty so long as you meet the requirements. To take advantage of the Rule of 55, you must be at least 55 years of age and leave the job where you have a current 403(b) account. Older accounts from former employers aren’t eligible.

The Rule of 55 is important for 403(b) account owners because some may be eligible for retirement before 59.5. For example, if you have a 30-years-of-service retirement provision in your school’s pension plan and became employed by your district at the age of 25, you may be eligible to retire with full benefits at age 55.

Also, it’s good to know that the Rule of 55 only waives the 10 percent penalty. You still owe whatever income taxes that are otherwise due on those funds. Note also that the Rule of 55 only applies to 403(b)s and 401(k)s. It doesn’t apply to IRAs.

403(b) Distribution Options

Once you decide that you will taking money from your 403(b), whether at 55, 59.5, or some other age, it’s time to figure out how and when you want to make those withdrawals.

Standard Withdrawals from a 403(b)

The standard withdrawal rules for a 403(b) are the same as those for other retirement accounts. You will need to meet one of these conditions:

Reach age 59.5
Terminate your employment
Become disabled
Encounter a designated financial hardship or emergency
Pass away when your beneficiaries can make various withdrawals

Whenever you withdraw money from your 403(b) account, the amount withdrawn is taxable at your standard income tax rate. If, on the other hand, you have a Roth 403(b) account, it was funded with after-tax dollars like other Roth accounts. So long as you meet the withdrawal conditions, including having had the account for at least five years, you can generally take out money tax-free.

It’s important to remember that none of the events above requires that you take a withdrawal. You can simply leave your money there if you think that is your best option. A financial advisor can guide you in making that decision.

Early Withdrawals from a 403(b)

As discussed above, you can take early withdrawals under the Rule of 55. You must be leaving your job and at least 55 years old. However, using the Rule of 55 requires that your funds remain in the 403(b) plan.

You can also take substantially equal periodic payments under Rule 72(t). You can do this anytime but must continue taking the payments for the longer of five years or reaching age 59.5. Again, 72(t) eliminates only the 10 percent penalty. Any taxes due will still be due as you receive your money.

There are a few things that are good to know about this option. Sometimes funds inside a 403(b) account can take time to withdraw, as you will usually need approval from your 403(b) plan’s third-party administrator to access them. No matter what tax bracket you fall in, many 403(b) plans also impose mandatory 20 percent tax withholding on cash withdrawals. You might also have fewer options in general.

Early withdrawals for disability or unreimbursed medical expenses above a certain percentage of your adjusted gross income won’t incur a penalty, either. In other words, your retirement savings can be a safety net for catastrophic out-of-pocket medical expenses.

Required Minimum Distributions and 403(b)s

As with other retirement accounts, your 403(b) account requires you to take required minimum distributions (RMDs). For most people, this starts at either age 72 or 73. Check out our article on RMDs here, and ask your financial professional for more guidance on this if needed.

The amount you must take out is calculated on the prior year-end balance and IRS life expectancy charts. Many plan administrators will handle this automatically for you. However, it’s good to be sure to confirm it’s done because the penalties for missing an RMD include a 50 percent tax.

If you should have withdrawn $1,000, you will still need to take it out and pay the taxes on it, but you will also give $500 of it to the IRS. Your financial advisor can help you remember to do all your RMDs. They can also assist you with ideas for using the funds after you withdraw them.

403(b) Rollover Options

Rolling your 403(b) over into another retirement vehicle may be another option after you switch jobs and retire.

These plans often charge administrative fees on top of the fees already charged by the investment options in your plan. Rolling over into another retirement account can often be less costly and give you broader investment options.

Technically, a rollover is a distribution. However, putting the funds into another tax-advantaged requirement account won’t be subject to penalties or taxes. The critical thing to remember is that the funds must be moved into the new account within 60 days of receiving your funds.

If not, you will have a taxable distribution. Often, your plan administrator will transfer assets in a trustee-to-trustee transfer with reduced risk of an accidental distribution. You can ask your financial professional to explain this if you have questions or need more information.

You may also consider using your 403(b) assets to create a guaranteed income stream for your retirement years. A financial professional licensed to offer annuities can help you understand the various annuity types and applicable riders that can create a retirement account tailored to your needs.

Remember, though, that annuity guarantees are based solely on the claims-paying ability of the issuing insurance company, so be sure to do your due diligence.

Your options for rolling over your 403(b) include:

IRAs (Roth or traditional)
Other IRAs such as SIMPLE IRA
457(b) plan (if one is available to you)
401(k) plan (if available)
Other 403(b) plan (also if available)

Should you roll the assets into any kind of Roth account, you will owe taxes on the entire rollover amount. Further, if you have a Roth 403(b), you can only move it into another Roth vehicle.

Moving your funds from a 403(b) to another qualified retirement account can reduce your expenses and give you much more flexibility in your investment options.

Working with a financial professional can help you understand the options available, and which options might make sense for you.

403(b) Loans

You may need to access some of your 403(b) assets, but none of the withdrawal options fits your circumstances very comfortably. In that case, if your plan permits, you may take a loan from your plan and pay yourself back with interest over time.

Certain rules apply as to how much you can borrow. Check with your plan administrator for more information.

What happens if you leave the company before you repay your entire loan? Then you will either have to pay it immediately or treat the balance as a withdrawal, subject to taxes and penalties, as applicable.

Questions to Ask Before Making Decisions on 403(b) Distributions

Now that we have covered what options are available, these questions can help in exploring what options for your 403(b) might be right for your situation:

What does your financial picture look like?
When will you retire? When will you actually need these assets?
Do you need to cover a gap between retirement and Social Security?
What will your retirement income be?
How much of that income is guaranteed so that you can be sure to cover your lifestyle?
What does your 403(b) offer you in retirement?
What are its limitations (fees, investment options, etc.)?

If you would like assistance in answering these questions, you might consider working with an independent financial professional. They can help you get through these rules and regulations, along with the what-ifs, and maybes, to explore different options for your situation.

If you are looking for someone to guide you, many independent financial professionals are available at SafeMoney.com. Use our “Find a Financial Professional” section to connect with someone directly, where you can discuss your financial goals, concerns, and situation. Should you want a personal referral, please feel free to contact us at 877.476.9723.

The post 403(b) Distribution Rules – How They Work first appeared on SafeMoney.com.

How Does a 403(b) Work When You Retire?

admin — Fri, 13 Aug 2021 14:45:13 +0000

You have worked hard for years, but you may be uncertain about what to do with your 403(b) after you leave your job. If you are at or near retirement and you have been saving money in your 403(b) plan during that time, you can have several options.

Retirement is a major life milestone, and knowing the paths that you can take with your retirement savings can have a big impact on the quality of life you can enjoy after you stop working. Here is a breakdown of the different choices of what you can do with your 403(b) after you have left a full-time career, and how each of these options work.

As you go over your 403(b) retirement options, a good thing to think about is how, in retirement, you will replace the income that you brought home from your career. Your retirement savings inside your 403(b), and probably money inside other accounts, will come into play here.

What Is a 403(b) Plan?

Before we delve into your different options for retirement, let’s quickly cover what a 403(b) plan is. Simply put, a 403(b) is a type of retirement savings plan that lets you accumulate money on a tax-advantaged basis.

Just as with a 401(k) plan, employers offer it as a vehicle for their employees to build savings for retirement. However, 403(b) plans are typically offered by certain non-profit organizations or government employers.

Public schools, universities, hospitals, 501(3) non-profits, or religious groups are common workplaces that provide a 403(b) retirement savings plan. This plan lets you contribute part of your paychecks toward your retirement. Your employer may offer some sort of match on your contributions as well, but not all employers do.

Since it’s a tax-advantaged plan, a 403(b) lets you contribute money for retirement on a tax-deferred basis. In other words, your contributions reduce your taxable income for each year that you put money away. The IRS tax code has set limits on how much money can be contributed each year.

Since a 403(b) is tax-deferred, your money grows without taxes while it’s inside the account. Where you are taxed is on the backend, when you take withdrawals from your 403(b) account. The plan is set up this way so people have incentive to save for their retirement years.

If future taxes are of concern to you, some 403(b) plans also come with Roth account options. If you go that route, your contributions to your Roth 403(b) account will be taxable. However, the money will grow tax-free inside the account, and your withdrawals will be tax-free on the backend as well.

Important Milestones That Can Affect You

Request a Review of Your 403(b) Plan and Other Retirement Benefits

Join thousands of other public employees who have more confidence and peace of mind about their 403(b) and other hard-earned benefits. Complete the form to request a no-cost, personal retirement and 403(b) plan review.

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Since you have a 403(b) plan, you may be familiar with how there is generally a 10% penalty for withdrawing any money before you reach age 59.5. These withdrawals are subject to the penalty along with income taxes due.

Once you reach 59.5, you can take withdrawals without the penalty. That being said, there is an exception to this rule that applies to those who aren’t yet retired.

It’s called the Rule of 55, and it allows those who are 55 and older to withdraw money from their 403(b) without a tax penalty, as long as certain conditions are met.

If you are between the ages of 55 and 59.5 and get laid off, are fired, or quit your job, then you can pull money out of your 403(b) account without penalty. The Rule of 55 applies to those who leave their jobs at any point during or after the year in which they turn 55.

However, this rule applies only to money inside your current 403(b) plan. This is the plan that you invested in while you were employed in the job that you leave at age 55 or older. The rule doesn’t work for old retirement plans at former jobs. Instead, the Rule of 59.5 would apply for those savings.

No decision of what to do with your money should be made without very careful thought of all the pros, cons, and consequences of each option. You might consider seeking help from an experienced financial professional who acts in your interest and can bring an impartial perspective.

Also, keep in mind that income taxes will be due on withdrawals. You also can’t keep money inside your 403(b) forever and avoid taxes. Required minimim distributions will apply once you reach your 70s.

How Does Your 403(b) Work at Retirement?

As you near these age milestones above or just retirement in general, you may have a variety of options for the assets inside your 403(b) plan:

Keeping the money where it is
Moving your money over into another account like an IRA
Making withdrawals periodically from your account
Taking a lump-sum distribution of your money

Option #1 – Keep Your Money Where It Is

The first option is to simply keep your savings in your 403(b) retirement plan. The mutual funds and other investment options in these plans can vary widely in terms of fees and selections alone.

If you are happy with how your money has done, you might simply choose to keep it where it is. However, you will face withdrawal requirements in the future via required minimum distributions if you do go this route.

Option #2 – Move Your Money Over Into Another Account

If you would like to explore what you think might be better alternatives outside of what your plan offers, then you can roll it over into another account, like a traditional IRA. This can let you move your money into an account that is managed by your financial professional, if you are working with one.

Ask your financial professional about how you can transfer or roll this money over without tax hits. It’s important for you to have this done right. It’s also prudent to evaluate this option in terms of potential negatives and determine if the positives outweigh them before deciding to move forward.

Should you worry about taxes on your money, another option is a Roth conversion on your 403(b) plan assets. You could move your money into a Roth IRA and pay the tax man upfront. In return, this might help you reduce taxes on your retirement income in the future.

Be sure to confer with an experienced tax advisor about the pros and cons of this route. You might also talk with your tax advisor and financial professional about making this conversion over time. That can help you keep the tax man at bay while making your overall tax liability for each year more manageable.

Option #3 – Take a Total Distribution from Your Plan

This option is considered by most financial professionals to be the worst thing you can do with your retirement funds.

Most of them would say that this should generally only be done as a means of last resort. For example, you might be in a dire financial emergency, need a large chunk of money immediately, and have no other options.

This can easily result in a larger tax bill than you would have. A distribution of this size will often land you in a (much) higher tax bracket.

Option #4 – Make Periodic Withdrawals from Your 403(b) Account

Of course, you can also choose to keep your money inside the 403(b) account and take money out from it in periodic withdrawals. This can be as you need the income or as a supplement to other income streams that you are receiving.

No matter what tax bracket you fall in, many 403(b) plans also have mandatory 20% tax withholdings on cash withdrawals. You might also have fewer options in general. The point? There are pros and cons to every financial decision that can possibly be made.

As mentioned earlier, you can withdraw money penalty-free from your 403(b) when you are 59.5 – or 55 years old if you plan on taking early retirement.

Many teachers, many government employees, and some other employees will receive a pension of some sort after they retire. Some school systems also have their teachers pay into Social Security so that they can get income from that source as well.

But in some cases, the pension payouts plus Social Security benefits will not equal 100% of your salary when you retire. This is where your 403(b) plan distributions come in.

You can structure your withdrawals to cover the gap between your guaranteed sources of income and your living expenses. Regardless of how much you might need for monthly income, you probably don’t want to take a chance on running out of money.

How Much Income Will You Need for Retirement?

It’s a good idea to consult with a financial professional. They can help you see how much income you can receive from your retirement savings each year without depleting your money too quickly.

If you are nervous about running out of money too soon, then you may want to consider an annuity as part of your retirement strategy. Annuities will pay you a stream of income that is guaranteed to last for your entire life, even if you completely deplete all of the money in the contract.

They are designed to protect you against outliving your income. Besides Social Security, annuities are the only financial vehicle on the planet that can do this for you.

How Do Annuities Work?

There are many different types of annuities available in the marketplace today. Here’s a quick rundown of how they work.

Fixed Annuities

Fixed annuities will provide guaranteed protection of the money put into them, and they will also pay you a guaranteed interest rate. But the interest rates on this annuity tend to be the lowest among any type of annuity right now.

Variable Annuities

Variable annuities invest your money in a selection of funds, called mutual fund subaccounts. Your money can go up and down in value depending on what the financial markets they are in do.

You might have owned a variable annuity if you are working in a public education system or have a friend who has owned one. This annuity carries the most risk of all annuity types, but it also has the most growth potential of them all.

Fixed Index Annuities

Another annuity is a fixed indexed annuity. It also guarantees your principal. This annuity doesn’t provide guaranteed growth like fixed annuities do, but it usually has more growth potential.

Indexed annuities are linked to an underlying benchmark index, and you might have heard of some, such as the S&P 500 price index. When the index goes up, a proportionate amount of interest is credited to the contract.

When the index goes down, the annuity simply earns nothing for that period. It’s credited zero percent. What’s more, once these interest earnings have been credited to your fixed index annuity, they are locked in. As a result, your original money and your interest earnings are protected.

No matter what annuity you choose, all types of annuities can pay you a guaranteed income for as long as you may need it.

Planning for Your Future Retirement

If you are still working, you have a 403(b) plan, and you are at or near retirement, you will have some choices regarding your 403(b) plan and how you want to use it going forward.

You may need to enlist the help of a knowledgeable financial professional to do this. They can help you look at your complete financial picture, understand your 403(b) and other retirement benefits that you may have, and make confident and informed financial decisions.

Depending on your situation, risk tolerance, and goals, they can help you create a plan with what you have to achieve your objectives with a minimum of risk. Talk to your financial professional for more information on 403(b) plan options in retirement and how you can decide what is right for you.

Are you looking for a financial professional to help guide you and walk you through these what-ifs? Many independent financial professionals are available at SafeMoney.com to serve you.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, please call us at 877.476.9723.

The post How Does a 403(b) Work When You Retire? first appeared on SafeMoney.com.