Is There a Penalty for 403b Early Withdrawal?

There is a penalty for 403b early withdrawal. Generally, if a person is not retired or is under the age of 59.5, then the person will be subject to a 10 percent tax on the money withdrawn. If the owner of the fund retires before age 55, it is possible to get the money in payments over time, however. For people who are not retired and are under the age of 59.5, it is sometimes possible to take out a 403b early withdrawal loan to avoid the penalties for early withdrawal, but this should be done with caution since it can have severe financial consequences.

The 403b was created in 1958 as a tax deferred retirement plan in the United States. It is available to employees of certain non-profit organizations and to employees of educational institutions, such as teachers, school administrators and librarians. No taxes are paid on the money before it is put into the 403b plan.

Normally, in order to withdraw money from the 403b plan, a person must be over the age of 59.5. Withdrawals may also be made if the person retires or is disabled. If the plan owner dies, beneficiaries can collect payments.

Those who retire before age 55 are eligible for 403b early withdrawal without penalty, but the plan owner must consent to a Substantially Equal Periodic Payment (SEPP) program. Under this program the owner will receive a series of payments that must continue until the owner reaches the age of 59.5. If the owner is less than five years from reaching age 59.5, he or she must continue payments for five years from the start date.

Another option for a 403b early withdrawal without penalty is to take out a loan. Fund owners should consult with a finance or tax professional before taking out a loan on a 403b fund since there are some risks associated with the loan. Most 403b early withdrawal loans must be repaid within five years. The exception is if the loan is used to pay for a home, then the owner has 30 years to pay back the loan. Taking out a loan will decrease the amount of money accumulated toward retirement since the amount of loan does not count toward the base amount on which the interest is calculated. If the owner defaults on the loan, the balance of the loan will be taxed at the 10 percent penalty rate.