403(b) Retirement Account Disbursement Options

by John Csiszar, Demand Media
    Disbursements from a 403(b) are taxable.

    Disbursements from a 403(b) are taxable.

    Also known as a tax-sheltered annuity, a 403(b) plan is essentially a 401(k) plan for ministers or employees of public schools or charitable organizations. Since a 403(b) is designed for retirement savings, you can generally take a distribution only when you reach age 59 1/2, become disabled, leave your job or have a demonstrable financial hardship. Disbursements can usually be taken as a lump sum, an annuity or an IRA rollover.

    Total Distribution

    The simplest way to take money out of your 403(b) is to take a complete distribution. Under this option, you simply ask your 403(b) administrator to cut you a check, and then you are free to use the money as you please. Unfortunately, a total distribution is usually not the best option from a tax standpoint. Since the entire amount you take out of a 403(b) is taxable as ordinary income, a large 403(b) disbursement could push you up into a higher tax bracket.

    Partial or Regular Distributions

    You can take regular payments from your 403(b) over time, rather than taking it all out at once. Depending on your preference, your employer can set up these distributions as an annuity, which will pay you substantially equal payments over time, or you can manually request a distribution whenever you like. One of the benefits of a partial distribution is that you can control the amount of taxable income you generate from year to year.

    Rollover

    If you don't have an immediate need for the cash in your 403(b), you can roll over your account into another retirement plan, such as an individual retirement account. A rollover is simply a transfer of funds from one retirement account to another. In addition to a traditional IRA, you can roll over your 403(b) balance into other types of retirement plans, including a SEP-IRA, a Roth IRA or even another 403(b) plan. While you will pay tax on the rollover if you transfer to a Roth IRA, other rollovers are tax-exempt.

    Mandatory Distributions

    The benefits of tax-deferred growth can be so significant that you might wonder why you have to take a distribution from the account at all. Unfortunately, you can't leave your money in a 403(b) plan forever. The IRS mandates that you begin taking a minimum amount at least annually once you reach age 70 1/2. Some plans have an exception for pre-1987 accruals, in which case you can wait until you turn 75. The amount you must take is computed by an IRS formula that takes into account your age and your account balance. Neglecting to take your required distribution carries the severe penalty of a 50 percent tax on the amount you were supposed to withdraw.

    About the Author

    John Csiszar began writing in 1989 at the ERIC Clearinghouse for Junior Colleges. His work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.

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