Can You Withdraw From a 403(b) While Still Employed?

You may be able to withdraw money from a 403(b) while you are still employed, but only if federal rules and your employer’s plan permit the specific transaction. Many plans allow in-service withdrawals after age 59½, while some also allow hardship distributions or loans under their terms. Federal rules may permit an option without requiring the plan to offer it, and access can depend on which funds make up your account. A payment from pre-tax savings is generally taxable as income, and an additional 10% early-distribution tax may apply before age 59½ unless an exception applies. Before requesting money, confirm your plan’s rules and consider taxes, fees, repayment obligations, and the retirement growth you could give up.

What Is an In-Service Withdrawal?

An in-service withdrawal is a distribution from a workplace retirement plan while you still work for the organization sponsoring it. For a 403(b), the options available to you depend on federal rules and the plan’s written terms. A plan can offer only the options it has adopted, so a federal rule allowing a type of withdrawal does not guarantee that your plan offers it.

The IRS 403(b) FAQs explain that plans may allow loans and hardship distributions. Plans may also allow withdrawals after age 59½. Your plan administrator can confirm which options apply to your account and what conditions you must meet.

When Can You Take Money Out?

After Age 59½

If you are at least 59½, your plan may allow you to withdraw money while you continue working. Reaching that age does not automatically make every dollar in your account available. The plan may limit access based on the source of the funds or set minimum withdrawal amounts and processing requirements.

Ask whether the payment can be made to you or transferred to another eligible retirement account. A payment made directly to you may have different tax consequences from a permitted rollover. Your plan administrator can explain which choices are available under your plan.

Even when a withdrawal is allowed, consider its long-term cost. Money removed from the plan is no longer invested there and cannot benefit from future growth within the account.

For a Qualifying Hardship

A hardship distribution may be available when you have an immediate and heavy financial need and your plan permits this type of withdrawal. It is not a general source of extra spending money. Your plan administrator can explain what qualifies under the plan and what documentation you must provide.

A hardship distribution may be limited to specific sources of money in your account. For example, the plan may restrict access to your own elective deferrals and exclude other funds. The amount may also be limited to what is needed to meet the qualifying need, so you should not assume that you can withdraw your full balance.

Approval for a hardship distribution does not automatically make it tax-free or exempt it from the additional 10% early-distribution tax. That tax may apply to a taxable distribution before age 59½ unless a separate exception applies. A hardship reason alone is not an exception. The IRS guidance explains 403(b) distribution rules. A tax professional can help clarify how tax rules apply to your circumstances.

Through a Plan Loan

Some 403(b) plans offer loans. A loan is not a withdrawal because you borrow from the plan and must repay the amount under its terms. Repayment requirements and fees depend on the plan. Before borrowing, ask what happens to the loan if your employment ends or changes.

Repaying a loan as required can help avoid a permanent reduction in your retirement balance. However, missed payments or failure to follow the plan’s rules can have tax consequences. Compare the repayment obligation with the cost of a distribution before deciding.

How Do Taxes and the 10% Tax Differ?

Income tax and the additional 10% early-distribution tax are separate issues. A distribution from pre-tax 403(b) money is generally included in your taxable income for the year you receive it. Whether the additional 10% tax applies depends on your age and whether a specific exception covers the distribution.

Avoiding the additional 10% tax does not necessarily make a distribution free of income tax. Similarly, calling a payment a hardship distribution does not by itself eliminate either tax. If your account includes pre-tax savings, designated Roth savings, or after-tax contributions, ask how the plan will treat the specific funds being distributed.

The plan may withhold tax from a distribution, depending on the type of payment. Ask your plan administrator what withholding applies and consider how the distribution could affect your tax return. For information about a related early-withdrawal question, see the early withdrawal tax.

What Should You Ask Before Requesting Money?

Your benefits portal may provide a starting point, but the plan administrator can confirm the rules that apply to your account. Ask:

• Does the plan allow an in-service withdrawal for my reason or age?
• Am I eligible based on my age and account sources? What documentation is required?
• How much can I withdraw? Are there minimums or processing fees?
• How will the distribution be taxed? What withholding will apply?
• Could the additional 10% tax apply? Is there a specific exception that may cover my situation?
• Does the plan offer a loan? What are its repayment terms?
• How could taking the money affect my retirement savings and future investment growth?

How Should You Weigh Your Options?

First, determine whether the expense is urgent and unavoidable or whether a payment arrangement or another funding source could address it. Then identify the smallest amount that would solve the problem. Estimate the full cost of accessing plan money, including income taxes, a possible additional 10% tax, any fees, and retirement growth you may give up.

If you are applying for a hardship distribution, gather the documentation your plan requires before submitting a request. If you are considering a loan, review the repayment schedule and what would happen if your employment changes. If you qualify for an age-based withdrawal, ask whether a smaller payment would meet your need.

*This article is for general informational purposes only and is not legal advice.