403B Withdrawal Requirements
- 403b plan distributions have tax consequences.tax forms image by Chad McDermott from Fotolia.com
Congress created 403b plans for retirement plans to allow non-profit employees to have a retirement plan through their employer. These plans offer tax-deferred savings, meaning that contributions to the account are made with pretax dollars and the money grows tax-free. Only when the money is withdrawn do you have to pay taxes on the money. However, if you take a non-qualified withdrawal, you may have to pay additional penalties. - 403b plans only permit money to be withdrawn from the account under limited circumstances. Qualified withdrawals from a 403b plan take place when you reach age 59 1/2. These withdrawals are reported as taxable income, but you do not have to pay any penalties on the withdrawals. Other times that non-qualified withdrawals are permitted include when the employee leaves employment, whether by choice or when fired; if the employee suffers a permanent disability; or has a financial hardship. Financial hardships refer to situations where the employee has no other financial resources to use to meet the need, such as needing money to avoid eviction.
- Non-qualified withdrawals must also be reported on taxes and may be subject to a 10 percent tax penalty on the amount of the withdrawal. The penalty applies to almost all early withdrawals, including hardship distributions. Early withdrawals exempt from the 10 percent early withdrawal penalty include if the withdrawal is due to a permanent disability or if the employee leaves employment after turning 55 years old.
- The IRS subjects 403b plans to required minimum distributions starting in the year that the account holder turns 70 1/2 years old. These distributions must be included in your taxable income even though they are required by the IRS. These distributions cannot be rolled over tax-free into another account. The size of the distribution depends on how much money is in the account and the age of the account holder.
