403(b) Withdrawal Rules: Penalties, Exceptions, and RMDs

The 403(b) withdrawal rules turn on age and reason. Once you reach 59½, you can take money out for any reason without a penalty, though traditional (pre-tax) withdrawals still count as ordinary income. Take money out earlier and you owe a 10% additional tax on top of income tax unless a specific exception applies. At 73, the direction reverses: the IRS starts requiring you to withdraw a minimum amount each year.

When Your Plan Will Release the Money

Before the tax question comes the access question. Your salary-reduction contributions generally cannot be distributed until one of the following happens:¹

You reach age 59½.
You separate from the employer sponsoring the plan.
You become totally and permanently disabled.
You die (funds pass to your beneficiary).
You demonstrate an immediate and heavy financial need, if your plan permits hardship withdrawals.

Employer contributions and other plan money may follow different timing under the plan’s own rules. Even when your plan will release funds, that is a separate question from whether the 10% early withdrawal penalty applies.

The 10% Early Withdrawal Penalty

Any distribution taken before age 59½ that doesn’t qualify for an exception gets the 10% additional tax stacked on top of the regular income tax you already owe on the withdrawal.²

You report the penalty on Form 5329 when you file. If your distribution qualifies for an exception but the code on your 1099-R doesn’t reflect it, the same form is how you claim the exception.

Ways to Withdraw Before 59½ Without the Penalty

The IRS recognizes a long list of situations that waive the 10%. Some are decades old; several were added by the SECURE 2.0 Act starting in 2024. Your plan still has to permit the distribution for you to take it.

The Rule of 55

If you leave your job during or after the calendar year you turn 55, distributions from that employer’s 403(b) come out penalty-free. The exception only covers the plan tied to the employer you separated from. Money you had already rolled into an IRA before leaving does not qualify.²

Public Safety Employees

Qualified public safety employees in a governmental 403(b) can start earlier. After separating from service, they can take penalty-free distributions during or after the year they reach 50 or complete 25 years of service under the plan, whichever comes first.³ This covers firefighters, law enforcement officers, and similar roles in state or local government plans.

The Standing Exception List

Death of the account holder, for distributions to a beneficiary.
Total and permanent disability.
Substantially equal periodic payments (SEPP), a series calculated using your life expectancy. Once started, you generally can’t change the schedule until the later of five years or age 59½ without triggering retroactive penalties.⁴
Unreimbursed medical expenses above 7.5% of your adjusted gross income.
A qualified domestic relations order (QDRO) directing payment to a spouse or former spouse in a divorce.
An IRS levy against the account.
Qualified military reservists called to active duty for at least 180 days.
Birth or adoption expenses, up to $5,000 per child. Repayable to the plan later.²

SECURE 2.0 Additions

Effective for distributions after December 31, 2023. These categories are optional for plan sponsors, so your employer must adopt them before you can use them.

Emergency personal expenses. One distribution per calendar year of up to $1,000 (or your vested balance above $1,000, if that’s less). Repayable within three years, and you can’t take another emergency distribution during the repayment window unless you’ve repaid the earlier one.
Terminal illness, when a physician certifies a condition expected to result in death within 84 months. Repayable within three years if your condition improves.
Domestic abuse survivors, up to the lesser of $10,000 or 50% of your vested balance, available within 12 months of the abuse. Repayable within three years.
Federally declared disasters, up to $22,000 per disaster if you had an economic loss in a declared disaster area. Repayable within three years.²

The repayment feature on the newer exceptions is worth using. If you put the money back within three years, you can amend your prior return and recover the income tax you paid, which effectively makes the distribution a short-term loan from your own retirement savings.

Hardship Withdrawals

A hardship withdrawal lets you take money out before 59½ when you face an immediate and heavy financial need you can’t reasonably meet with other resources. Not every 403(b) offers hardship withdrawals, so start with your plan documents.

The IRS lists safe-harbor events that automatically count as an immediate and heavy financial need:⁵

Medical care expenses for you, your spouse, dependents, or a plan beneficiary.
Costs of buying your principal residence (not mortgage payments).
Tuition, room and board, and related fees for the next 12 months of post-secondary education for you, your spouse, children, dependents, or a beneficiary.
Payments needed to prevent eviction from or foreclosure on your principal residence.
Funeral and burial expenses.
Certain expenses to repair damage to your principal residence.

The amount is limited to what you actually need, including any taxes and penalties the withdrawal itself will generate. Hardship distributions cannot be rolled over into another retirement account, so the money leaves your tax-sheltered savings permanently.⁶

Under SECURE 2.0, plan sponsors of 403(b) plans can accept your written self-certification that you meet the requirements rather than demanding documentation upfront. Whether your plan uses this streamlined approach is up to your employer, and the plan can still request supporting documents if it has reason to doubt the certification.

One point people miss: hardship alone does not waive the 10% penalty. If you take a hardship withdrawal at 45 and your only justification is the hardship itself, you still owe the 10% on top of income tax. To skip the penalty, you have to separately qualify for one of the exceptions above.

A Loan Instead of a Withdrawal

If your plan permits loans, borrowing from your own 403(b) usually beats a hardship withdrawal. A plan loan is not treated as a taxable distribution as long as you follow the repayment rules. No income tax, no 10% penalty.⁷

You can borrow up to the lesser of 50% of your vested balance or $50,000. If 50% of your vested balance is less than $10,000, some plans allow you to borrow up to $10,000, but plans are not required to offer that floor.

Repayment generally runs no longer than five years, with at least quarterly payments. A loan used to buy your primary residence can be repaid over a longer period.

The risk is default. Miss payments and fail to cure the default within the plan’s grace period, and the outstanding balance becomes a deemed distribution. The plan reports the unpaid amount on a 1099-R, and you owe income tax plus the 10% early withdrawal penalty if you’re under 59½.⁸ The trap catches people who leave a job with an outstanding balance: the loan often comes due in full, and if they can’t repay, the tax bill lands the following April.

How the Withdrawal Is Taxed

Traditional 403(b) contributions went in pre-tax, so every dollar coming out (both contributions and earnings) is ordinary income in the year you receive it. The distribution stacks on your wages, Social Security benefits, and other income to determine your bracket. A large lump-sum withdrawal can push you into a higher bracket than smaller distributions taken over several years would.

Qualified distributions from a Roth 403(b) are tax-free because you already paid tax on the contributions. To qualify, the account must have been open at least five years and the distribution must occur after age 59½, disability, or death. Non-qualified Roth withdrawals may owe tax on the earnings portion.

Withholding

For an eligible rollover distribution you receive directly rather than transferring it to another retirement account, federal law requires mandatory 20% withholding, and you can’t opt out.⁶ For distributions that aren’t rollover-eligible, like hardship withdrawals or RMDs, the default rate is 10%, though you can adjust it or elect out using Form W-4R.

Direct vs. Indirect Rollovers

If you’re moving 403(b) money to another retirement account, the method matters. A direct rollover (trustee-to-trustee) moves the funds with no withholding, and the full balance lands in the new account.⁹

An indirect rollover sends the check to you, the plan withholds 20%, and you have 60 days to deposit the full original amount (including the withheld portion, which you have to replace from other funds) into an eligible plan. Deposit less than that, and the shortfall is a taxable distribution, plus the 10% penalty if you’re under 59½. The direct route is almost always the better choice.

Required Minimum Distributions at 73

Once you reach age 73, the IRS requires you to start pulling money out of a traditional 403(b) whether you need it or not. Your annual RMD is your account balance as of December 31 of the prior year divided by a life expectancy factor from the IRS tables.¹⁰

Your first RMD must be taken by April 1 of the year after you turn 73. Every RMD after that is due by December 31. Delaying the first one to April means taking two RMDs in the same calendar year, which can push you into a higher bracket.

Still Working

If you’re still employed by the organization sponsoring your 403(b) and you don’t own more than 5% of the employer, you can delay RMDs from that plan until the year you actually retire. The exception only applies to the plan at your current employer. A 403(b) from a former job or any IRA you hold still has RMDs starting at 73.

Roth 403(b) Accounts

Starting in 2024, designated Roth accounts inside employer plans, including the 403(b), are no longer subject to RMDs during the account holder’s lifetime. Before this change, Roth 403(b) money faced the same RMD rules as traditional accounts, unlike Roth IRAs. Your after-tax contributions and their earnings can now keep growing without a forced distribution schedule.

Missing an RMD

If you don’t take the full amount, you owe a 25% excise tax on the shortfall, which drops to 10% if you correct the mistake within two years.¹¹ You can also request a full waiver by filing Form 5329 with a written explanation showing the shortfall was due to reasonable error and that you’ve taken steps to fix it. The IRS reviews these case by case.¹²

1
Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
2
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
3
Internal Revenue Service. Publication 575 – Pension and Annuity Income
4
Internal Revenue Service. Substantially Equal Periodic Payments
5
Internal Revenue Service. Retirement Topics – Hardship Distributions
6
Internal Revenue Service. Pensions and Annuity Withholding
7
Internal Revenue Service. Retirement Topics – Plan Loans
8
Internal Revenue Service. 403(b) Plan Fix It Guide – You Haven’t Limited Loan Amounts and Enforced Repayments as Required Under IRC Section 72(p)
9
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
10
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
11
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
12
Internal Revenue Service. Instructions for Form 5329 – Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts