A 403(b) plan releases your money only when a federally defined event occurs, and the 403(b) distribution triggering events are reaching age 59½, separating from the employer, becoming disabled under the IRS definition, dying, or qualifying for a hardship withdrawal.1Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans SECURE 2.0 added a handful of newer categories that individual plans may choose to offer. Hitting one of these events lets you take the money out, but whether you owe a 10% penalty on top of income tax is a separate question that depends on your age and which trigger applies.
The Core Triggering Events
Federal tax law lists a short set of circumstances under which a 403(b) can pay out salary-deferral contributions:
- Age 59½. Once you reach this age, you can take distributions even while still working for the sponsoring employer. This is the most straightforward in-service access point.
- Severance from employment. Quitting, being laid off, or retiring all count. Once you’ve separated, your entire vested balance becomes available.
- Disability. The IRS uses a narrow standard. A physician must confirm you have a physical or mental condition that prevents you from doing any substantial work, and the condition must be expected to result in death or last indefinitely.
- Death. Your named beneficiaries gain access to the account.
- Hardship. A financial emergency meeting specific IRS criteria can unlock salary-deferral contributions while you’re still employed.
These events are set in the Internal Revenue Code for both custodial accounts and annuity contracts held inside a 403(b) plan.2Office of the Law Revision Counsel. 26 USC 403 – Taxation of Employee Annuities Employer contributions and their earnings may follow slightly different rules depending on the plan document, but the salary-deferral restrictions above are the floor every 403(b) must enforce.
The 10% Early Withdrawal Penalty and How to Avoid It
Meeting a triggering event gets the money out. It does not automatically save you from the 10% early withdrawal penalty. If you’re younger than 59½ when you take a distribution, the IRS adds a 10% tax on top of ordinary income tax unless a specific exception applies.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
The exceptions most relevant to 403(b) participants:
- Separation at age 55 or older. If you leave your employer during or after the calendar year you turn 55, distributions from that employer’s 403(b) are penalty-free. For qualified public safety employees of state or local governments, the age is 50.
- Disability under the IRS standard exempts you from the penalty at any age.
- Substantially equal periodic payments. You can set up a series of payments calculated over your life expectancy, but you must have separated from the employer first, and you cannot change the schedule until the later of five years or reaching age 59½.4Internal Revenue Service. Substantially Equal Periodic Payments
- Terminal illness. Under SECURE 2.0, a distribution to someone whose physician certifies they are reasonably expected to die within 84 months is penalty-free.
- Death. Beneficiary distributions are never subject to the penalty.
Hardship withdrawals are the one people misread most often. A hardship gets the money out, but it does not by itself remove the 10% penalty. If you take a hardship distribution under 59½, you still owe the penalty unless you independently qualify under one of the exceptions listed above.
Hardship Withdrawals While Still Working
If you’re still employed and haven’t reached 59½, a hardship withdrawal is often the only way to reach salary-deferral money. The IRS defines a hardship as an “immediate and heavy financial need” and provides a safe harbor list of qualifying expenses:5Internal Revenue Service. Retirement Topics – Hardship Distributions
- Unreimbursed medical expenses for you, your spouse, dependents, or a plan beneficiary. There’s no requirement that bills exceed a percentage of income; that threshold applies to itemizing medical deductions, not hardship eligibility.
- Down payment and closing costs to buy your primary residence. Regular mortgage payments do not qualify.
- Tuition, fees, and room and board for the next 12 months of postsecondary education for you, your spouse, children, dependents, or a plan beneficiary.
- Payments needed to prevent eviction from or foreclosure on your primary residence.
- Funeral and burial expenses for you or a family member.
- Certain casualty-type damage to your principal residence.
The amount is capped at whatever satisfies the financial need, including any taxes and penalties the distribution itself triggers. Since 2020, plans no longer require you to take a loan first, and they can no longer suspend your contributions for six months after a hardship withdrawal.6Internal Revenue Service. Retirement Plans FAQs Regarding Hardship Distributions
Plan administrators can rely on your written self-certification that you have a qualifying need, though they can reject a request if they know the certification is false. In practice, most administrators still ask for supporting documentation: medical bills, a home purchase agreement, tuition invoices, or a formal eviction notice.
SECURE 2.0 Penalty-Free Distributions
SECURE 2.0 created several new penalty-free distribution categories that plans may choose to offer. Not every 403(b) has adopted them, so ask your plan administrator before assuming access.
Emergency Personal Expense Distributions
If your plan allows it, you can withdraw up to $1,000 per calendar year for unforeseeable or immediate personal or family financial needs. Written self-certification is enough. The withdrawal is taxable as income but exempt from the 10% penalty.7Internal Revenue Service. Notice 2024-55 – Certain Exceptions to the 10 Percent Additional Tax Under Code Section 72(t)
After taking one, you cannot take another from the same plan for three calendar years unless you either repay the full amount or make new contributions equal to or exceeding what you withdrew. The actual limit is the lesser of $1,000 or the amount by which your vested balance exceeds $1,000.
Domestic Abuse Victim Distributions
A participant who self-certifies as a victim of domestic abuse can withdraw the lesser of $10,000 (indexed for inflation) or 50% of their vested balance without the 10% penalty. The distribution must be taken within one year of the abuse and can be repaid to the plan within three years.3Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Terminal Illness Distributions
If a physician (an MD or DO, and not the participant) certifies that a participant’s illness is reasonably expected to result in death within 84 months, the participant can take a distribution of any amount penalty-free. The certification must include a description of the supporting evidence and the physician’s signature; self-certification is not accepted for this category. The money is still taxable, but participants who recover can repay within three years and reclaim taxes paid.
Loans: Access Without a Distribution
If your plan offers loans, borrowing from your own account is often the cheapest way to get cash while still employed. A loan is not a taxable event, so you avoid both income tax and the 10% penalty as long as you meet the repayment rules.
The maximum is the lesser of $50,000 or half your vested balance. Repayment runs in substantially level payments over no more than five years, with a longer term allowed for a loan used to buy your principal residence.8eCFR. 26 CFR 1.72(p)-1 – Loans Treated as Distributions If you default or leave your employer with a balance outstanding, the unpaid amount is treated as a taxable distribution and may trigger the 10% penalty if you’re under 59½.
Not every 403(b) allows loans. Church plans and some smaller arrangements may not include the feature. The plan document controls.
Roth 403(b) Qualified Distributions
The triggering events for a designated Roth 403(b) account are the same as for pre-tax contributions, but the tax outcome is different. A qualified distribution is completely tax-free if two conditions are met: it happens after a five-taxable-year period of participation, and it occurs after you reach age 59½, become disabled, or die.9Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
The five-year clock starts on January 1 of the first tax year you made a Roth contribution to that plan. A first Roth contribution in 2023 means the period ends on January 1, 2028. Distributions taken before that date, or before reaching 59½, include a taxable portion representing investment earnings.
Under SECURE 2.0, Roth accounts in employer plans like a 403(b) are no longer subject to required minimum distributions during the original owner’s lifetime, effective 2024 and beyond.
Required Minimum Distributions at 73
Once you reach age 73, the IRS forces distributions from your traditional 403(b) whether you want them or not. Required minimum distributions must begin by April 1 of the year following the year you turn 73, with subsequent RMDs due by December 31 each year.10Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
Some plans let you delay RMDs if you’re still working for the sponsoring employer past 73. The plan document controls whether this “still working” exception is available. A 403(b) from a former employer never qualifies for the delay, regardless of your current job.
Missing an RMD is expensive. The IRS imposes a 25% excise tax on the amount you should have taken. Correct the shortfall within two years and the penalty drops to 10%.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs You report the shortfall on Form 5329 with your federal tax return.
Distributions After Death
When a participant dies, the account passes to the named beneficiaries, and how quickly they must withdraw depends on their relationship to the deceased and whether they qualify as an “eligible designated beneficiary.”12Internal Revenue Service. Retirement Topics – Beneficiary
Eligible designated beneficiaries get the most flexibility. That group includes a surviving spouse, a minor child of the account holder, a disabled or chronically ill person, and anyone no more than 10 years younger than the deceased. These beneficiaries can generally stretch distributions over their own life expectancy. A surviving spouse can also roll the account into their own IRA and treat it as their own.
Everyone else, including adult children and siblings, must empty the account by the end of the tenth year following the year of the participant’s death. There’s no annual minimum during those 10 years, but every dollar must be out by the deadline. Beneficiary distributions are never subject to the 10% early withdrawal penalty, though pre-tax amounts are taxable as ordinary income in the year received.
Dividing an Account in Divorce
A qualified domestic relations order lets a court award part of a 403(b) to a former spouse, child, or other dependent as part of a divorce or separation. The QDRO must name both the participant and the alternate payee, specify the dollar amount or percentage, and match the plan’s available distribution options.13Internal Revenue Service. Retirement Topics – QDRO: Qualified Domestic Relations Order
A spouse or former spouse who receives a QDRO distribution is taxed as if they were the participant, so they can roll the money into their own IRA tax-free. If the alternate payee is a child or other dependent, the participant remains responsible for the taxes.
Rollovers After Leaving an Employer
After separating, you can move your 403(b) balance into another eligible account without triggering taxes. Pre-tax 403(b) funds can roll into a traditional IRA, a 401(k), another 403(b), or a governmental 457(b) plan.14Internal Revenue Service. Rollover Chart
The cleanest path is a direct rollover, where funds transfer straight from your old plan to the new one. If you take an indirect rollover instead and receive a check made out to you, the plan withholds 20% for federal tax, and you have 60 days to deposit the full distribution amount (including replacing the withheld 20% out of pocket) into another eligible plan. Miss the 60 days and the entire amount becomes taxable income, potentially with the 10% penalty added.15Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
This is where many people lose money. They take the indirect rollover, only deposit the 80% they actually received, and the IRS treats the withheld 20% as a taxable distribution. Request a direct rollover unless you have a specific reason not to.