A 403(b) works at retirement by turning the balance you built during your career into income you can draw on. You decide how the money comes out — as a single lump sum, a stream of periodic payments, an annuity, or a rollover to an IRA — and the IRS decides how much tax you owe and when you have to start taking withdrawals whether you want them or not. Understanding how a 403(b) works when you retire comes down to three questions: when you can withdraw without a penalty, how each dollar is taxed, and when the required minimum distributions begin.
When You Can Withdraw Without a Penalty
The main threshold is age 59½. Once you reach it, you can take any amount out of a 403(b) without the 10% early withdrawal tax that otherwise applies to retirement plan distributions.1Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts You will still owe ordinary income tax on pre-tax dollars, but the penalty falls away.
If you retire earlier, the separation-from-service exception (often called the Rule of 55) can help. It lets you take penalty-free distributions from the 403(b) you held with the employer you just left, provided you separated during or after the calendar year you turned 55.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions It only applies to that specific plan. Balances from earlier jobs, and any IRAs, are not covered.
A few other situations also waive the 10% penalty at any age. Total and permanent disability qualifies. So does a physician’s certification that you have a terminal condition expected to result in death within 84 months.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions You can also set up substantially equal periodic payments based on your life expectancy, but once you start, you have to keep them going for at least five years or until you reach 59½, whichever comes later.
Your Payout Options
Most plans offer several ways to receive your money, and you can combine methods as your needs change. What is actually available depends on your plan document.
- A lump-sum withdrawal gives you the entire balance at once. It provides full access, but a large single-year distribution can push you into a higher tax bracket.
- Periodic payments send you regular installments — monthly, quarterly, or annually — over a set number of years. This spreads the tax hit and produces predictable income.
- An annuity purchase uses part or all of your balance to buy a contract from an insurance company, which then pays a guaranteed stream of income, often for life. The insurer takes on the investment risk.
- A qualified longevity annuity contract, or QLAC, is a specialized annuity that begins payments at a future date up to age 85. The amount inside a QLAC is excluded from RMD calculations until payments begin.3Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
- A direct rollover moves your 403(b) balance straight into an IRA or another eligible employer plan. The money stays tax-deferred, and you avoid both the immediate income tax and the 20% mandatory withholding that applies to cash distributions.4Office of the Law Revision Counsel. 26 USC 402 – Taxability of Beneficiary of Employees Trust
How Distributions Are Taxed
Traditional (Pre-Tax) 403(b)
Every dollar withdrawn from a traditional 403(b) counts as ordinary income in the year you receive it. Your federal rate depends on your total taxable income for that year, and state income tax may apply on top depending on where you live.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill Because a large lump-sum withdrawal can push income into a higher bracket, spreading distributions across several years through periodic payments often produces a lower overall tax bill.
Roth 403(b)
Roth 403(b) distributions come out entirely tax-free, including the accumulated earnings, if two conditions are met: you are at least 59½, and at least five tax years have passed since your first Roth contribution to the plan. Withdraw before meeting both, and the earnings portion is taxable and may also trigger the 10% early withdrawal penalty.
The 20% Mandatory Withholding
If you take a cash distribution that is eligible for rollover but you do not roll it over, the plan administrator must withhold 20% for federal income tax before sending you the rest.6Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income That 20% is a prepayment toward your tax bill, not an extra tax. If your actual rate turns out to be lower, you get the difference back at filing. If it is higher, you owe more. A direct rollover to an IRA or another qualified plan avoids the withholding entirely.
Required Minimum Distributions
The IRS will not let tax-deferred money grow forever. At a certain age you have to start taking required minimum distributions, or RMDs, each year whether you need the money or not.
When RMDs Begin
Your starting age depends on when you were born. Anyone born between 1951 and 1959 begins RMDs at 73. Anyone born in 1960 or later begins at 75.7Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans Your first RMD is due by April 1 of the year after you reach that age. Every RMD after that is due by December 31.
One exception matters if you are still working. If you are employed by the sponsor of your 403(b) and you do not own 5% or more of the organization, you can delay RMDs from that plan until April 1 of the year after you actually retire.7Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans It does not apply to 403(b) accounts you still hold from former employers, and it does not apply to IRAs.
Roth 403(b) Accounts Are Exempt
Starting in 2024, Roth accounts inside employer retirement plans, including Roth 403(b) accounts, are no longer subject to RMDs. Before SECURE 2.0 made this change, Roth 403(b) holders had to take RMDs or roll the balance into a Roth IRA to avoid them. Now you can leave a Roth 403(b) alone and let it keep growing tax-free.
How the RMD Is Calculated
Each year’s RMD is your account balance on December 31 of the prior year divided by a life-expectancy factor from the IRS Uniform Lifetime Table.8Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) A $500,000 balance with a factor of 24.6 produces an RMD of about $20,325. The factor shrinks each year as you age, so RMDs slowly grow as a share of the balance.
If you have more than one 403(b), you calculate the RMD for each account separately and can then pull the combined total from any one of them (or split it however you like).9Internal Revenue Service. RMD Comparison Chart (IRAs vs. Defined Contribution Plans) That flexibility does not cross plan types. A 403(b) RMD cannot be satisfied by pulling from an IRA, and vice versa.
What Happens If You Miss One
Miss the deadline, and the IRS charges an excise tax of 25% of the shortfall. It drops to 10% if you correct the mistake by taking the missed amount and filing an updated return within the correction window, which generally runs through the end of the second tax year after the penalty was imposed.10Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans
If You Have an Outstanding 403(b) Loan
An unpaid loan against your 403(b) at retirement usually becomes a distribution. The plan reduces your account by the unpaid balance, called a plan loan offset, and that amount is treated as taxable income.11Internal Revenue Service. Plan Loan Offsets If you are under 59½ and no penalty exception applies, the 10% early withdrawal tax hits the offset too.
You can avoid the tax hit by rolling over an amount equal to the offset into an IRA or another eligible plan. The deadline is your tax-filing due date, including extensions, for the year the offset happens — typically October 15 if you request an extension.11Internal Revenue Service. Plan Loan Offsets You do not need to use the offset funds themselves; you can contribute replacement cash from other savings to complete the rollover.
Who Inherits Your 403(b)
Your beneficiary designations on file with the plan, not your will, control who receives the account after your death. Reviewing them after marriage, divorce, or the death of a previously named beneficiary is one of the most important steps in retirement planning.
A surviving spouse has the most flexibility. They can roll the inherited 403(b) into their own IRA, treat it as their own account, or take distributions over their own life expectancy. If you are married and want to name anyone other than your spouse as the primary beneficiary, most 403(b) plans require your spouse’s written consent.12Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent
For account owners who die in 2020 or later, most non-spouse beneficiaries must empty the inherited account by the end of the 10th year following the year of death.13Internal Revenue Service. Retirement Topics – Beneficiary Annual distributions during that window are not required, but the full balance has to be out by the deadline.
A narrower group called eligible designated beneficiaries can stretch distributions over their own life expectancy instead. That group includes the surviving spouse, a minor child of the account owner (until reaching the age of majority), a disabled or chronically ill individual, and any person no more than 10 years younger than the account owner. Once a minor child reaches adulthood, the 10-year clock starts on the remaining balance.13Internal Revenue Service. Retirement Topics – Beneficiary
Starting the Paperwork
Beginning distributions is mostly a paperwork process. Contact your plan administrator or log into the plan’s participant portal and request the distribution election form. It asks how you want the money paid (lump sum, periodic payments, rollover, or annuity), your tax withholding preferences, and bank account information for electronic transfers. For a rollover, you will also need the receiving institution’s name and your new account number so the plan can send funds directly.
If you are married, your plan may require your spouse to sign a consent form before it processes the distribution, especially if you are electing anything other than a joint-and-survivor annuity.12Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent Plans with benefits valued at $5,000 or less can pay a lump sum without spousal consent. Some plans accept electronic signatures through their portals; others require a notarized signature or a signature guarantee from a bank or brokerage. Processing typically takes one to two weeks after all documents are in.