403(b) Early Withdrawal Penalties: What to Expect

The 403B is a type of retirement account that is available to employees of nonprofit organizations. Its purpose is to help you get ahead when saving for retirement. If you are compelled to access the money once you put it in the account, you will have to deal with the penalties that result.

Early Withdrawal

Any time that you take money out of a 403B account before you reach the age of 59 1/2, you will be subject to an early-distribution penalty. This penalty is equal to 10 percent of the amount that you take out of the account. If you wait until after you are 59 1/2, you will not have to worry about any penalties and you can simply treat the money as if it were regular income.

Taxation

Besides paying the early-distribution penalty, you will also have to deal with the taxes that come with this maneuver. When you take money out of the 403B before you reach the age of 59 1/2, you have to treat the money as if it were part of your taxable income. The amount that you take out will be added to your annual income and you will be taxed at the applicable tax rate.

Withholding

When you take money out of your 403B, your account holder will withhold money to pay your taxes for you. The standard amount of withholding is 20 percent of the amount that is taken out. However, depending on your tax bracket, 20 percent may not be enough. Setting aside more than the 20 percent may be advisable if you are in a higher tax bracket.

Opportunity Cost

Besides the formal penalties that come with early withdrawal, you may also have to deal with the opportunity cost of taking the money out of your account. It most likely took you several years to build up the balance in your 403B account. When you take that money out and use it for something else, it could take you many years to build your account back up. You are also missing out on the interest that you would have been earning with the money in the account.