Withdrawing From a Tax-Sheltered Annuity

Learn about your options and their tax consequences before withdrawing money from a tax-sheltered annuity.

Learn about your options and their tax consequences before withdrawing money from a tax-sheltered annuity.

Tax-sheltered annuities, also known as 403(b) plans, let you save for retirement and pay taxes on the earnings later, when you presumably are in a lower tax bracket. You must be an employee of a qualifying nonprofit or educational organization to participate in a tax-sheltered annuity plan. The plan may offer fixed or variable annuities, depending on the provisions chosen by your employer. Fixed annuities provide guaranteed earnings, but the maximum return is limited. Variable annuities have the potential to earn more than a comparable fixed annuity, but you may also lose money on your investments.

Types of Withdrawals

Tax-sheltered annuities allow you to take money out of your account when you retire, become disabled or quit your job. Your employer may allow hardship withdrawals while you are still working for the company. Hardship withdrawals are typically allowed for major expenses such as the down payment on a home, tuition for you or a dependent, medical bills or funeral expenses.

Withdrawal Procedures

Request the necessary withdrawal paperwork from your employer or the 403(b) plan administrator. Include the required personal information, such as your name, Social Security number and address. If you will be rolling your money over, you must also open a new individual retirement account with the broker of your choice and list the account number on your withdrawal forms. If you are married and your distribution is more than $5,000, your spouse may also be required to sign the paperwork.

Taxes and Penalties

Unless you opt for a rollover, you will have to pay taxes on your withdrawal. Withdrawals from tax-sheltered annuities are classified as ordinary income. The plan administrator is required by law to withhold 20 percent from the distribution for federal taxes. You can choose to have another 2 percent withheld for state taxes, but it is not mandatory. If you are younger than 59 1/2, you must also pay a 10 percent early withdrawal penalty when you file your tax return.

Rollovers

You can defer your tax liability by rolling the withdrawal into another employer's plan or opening an IRA. When filling out your withdrawal forms, indicate that you will be rolling the money over and request a check payable to your new account. No withholding taxes will be taken out of your balance if you choose this method. If the check is written in your name, you still have 60 days to change your mind and roll the funds over. You must make an additional deposit out of your own pocket to cover the 20 percent that was withheld for federal taxes. You will be entitled to a refund of the withholding amount when you file your tax return at the end of the year.

 

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