Early Withdrawals From a 403(b) Plan

Taking money out of your 403(b) early will cost you at tax time.
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When it comes to 403(b) plans, an early withdrawal means any distribution taken before you turn 59 1/2 years old. In addition to setting back your retirement savings, early 403(b) withdrawals are also hit with income taxes and, unless an exception applies to all or some of the distribution, an extra tax penalty.

When Permitted

Just because you want the money in your 403(b) plan doesn't mean you're allowed to get it out. If you're under 59 1/2, the Internal Revenue Service only lets you take money out if you've left the job, suffered a permanent disability or have an extreme financial hardship. If you're still working for the same organization and you just want to go on a really nice honeymoon after you tie the knot, you're out of luck.

Income Taxes

Just like a qualified withdrawal in retirement, your early 403(b) withdrawal counts as taxable income when you file your tax return. When you put the money in, it wasn't counted as taxable income for that year, so the Internal Revenue Service requires you to pay taxes on the withdrawals. The money counts as ordinary income, so the higher your other income, the higher the tax rate on your 403(b) withdrawal. For example, if you fall in the 10 percent bracket, a $2,000 distribution will cost you $200 in income taxes. But, if you're in the 25 percent bracket, that same withdrawal costs you $500.

Early Withdrawal Penalty

On top of the taxes, you also owe a 10 percent tax penalty on your early withdrawal, barring an exception. To make matters worse, just owing this penalty is enough to make you file an income tax return -- even if you weren't otherwise required to do so. For example, say you're unemployed during the year and your only income is a $2,000 early 403(b) withdrawal. Even though you might not owe any taxes because your income is so low, you're required to file to pay the $200 penalty.

Penalty Exceptions

In a few cases, you might be able to avoid paying the extra 10 percent early withdrawal penalty on your early 403(b) distribution, but only if you meet the specific requirements of an exception. For example, you don't have to pay the 10 percent penalty on the portion of your withdrawal equal to your medical expenses that exceed 10 percent of your adjusted gross income. You also avoid the penalty if the distribution is pursuant to a qualified domestic relations order as part of a divorce; if the IRS levies your 403(b) plan; or if you're permanently disabled. While a general financial hardship might allow you to take an early withdrawal, it won't get you out of the penalties.

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