How a 403(b) Works After Retirement

Like its close cousin the 401(k), a 403(b) plan can be a convenient way to save for retirement if your employer offers one. Later, as your retirement date approaches, you’ll face some important decisions about how to handle the money you’ve built up in your account over the years. This article will walk you through your basic options and their tax implications.

Key Takeaways

• If you have a 403(b) plan at work, you may be able to leave it with your employer when you retire or roll it over tax-free into an individual retirement account (IRA).
• When you make withdrawals, you’ll have to pay income tax unless your 403(b) is a designated Roth account rather than the traditional type.
• If you withdraw money before age 59½, you’ll need to pay a 10% penalty.
• At age 73, you’ll be required to make annual withdrawals—required minimum distributions (RMDs)—from your traditional 403(b) or IRA.
• You don’t need to take RMDs from a Roth account.

Types of 403(b) Plans

Like 401(k) plans, 403(b) plans come in two basic types.

Traditional 403(b) Plan: The older and most common type of 403(b), this plan allows you to contribute to your retirement account on a pretax basis, meaning that you don’t have to pay income tax on that money until you later withdraw it. The investment earnings in your account also accumulate on a tax-deferred basis.

Roth 403(b) Plan. A newer type of plan that’s offered by some employers, a designated Roth 403(b) provides no tax break at the outset, but the money you later withdraw and whatever earnings it has accumulated in the meantime can be tax-free if you meet certain requirements.

If you wish, and your employer offers them, you can have both types of plans.

The Basic Rules

Once you retire, you can either leave your 403(b) account at your employer (if your employer allows it) or roll the money over tax-free into an IRA at a financial institution.

Either way, you don’t have to take any money out of the account until you reach the age when retired minimum distributions kick in (explained below). So unless you need the cash to cover your living expenses, you can simply let the account continue to grow.

How old you are when you finally begin to make withdrawals will affect how they’re treated for tax purposes.

Withdrawals Before Age 59½

In general, if you withdraw money from a traditional 403(b) or IRA before you’ve reached age 59½, you’ll have to pay both income taxes on the amount and a 10% early withdrawal penalty. There are, however, some exceptions to the penalty, such as for certain medical expenses and emergencies.

With a Roth 403(b), your withdrawals will generally be tax- and penalty-free if you’ve reached age 59½ and have had the account for at least five years.

Withdrawals After Age 59½

Once you’ve attained the magic age of 59½, you won’t have to worry about penalties, but you’ll still have to pay income tax on your withdrawals unless your account is a Roth.

Required Minimum Distributions (RMDs)

As mentioned earlier, if you have a traditional (non-Roth) account, you will have to start withdrawing money once you reach a certain age, currently 73. These mandatory annual withdrawals are known as required minimum distributions (RMDs).

The Bottom Line

In addition to Social Security and any other pension benefits or investments you may have, a 403(b) plan can be an important source of income in retirement. The longer you can postpone making withdrawals, the more money you’ll likely accumulate. If you have any questions about your retirement plan, consult a financial advisor.