How to Cash Out a 403(b) Early

How to Cash Out a 403(b) Early
••• Vadzim Kushniarou/iStock/GettyImages

When unemployment is high and U.S. citizens face the negative effects of relying too heavily on a jobless benefit that might end in the next few months, the IRS sometimes makes it easier for people to pull cash from retirement plans without incurring a costly penalty. Such is now the case with the 403(b).

The 403(b) Plan

A 403(b) plan is a U.S. tax-advantaged retirement savings plan that's available to those who work in public education, for a non-profit or cooperative hospital service organization and who are self-employed ministers. The plan allows an employee and an employer to contribute some portion of her salary to the plan up to ​$58,000​ for 2021.

Early 403(b) Cash Out

If you’re younger than 59½, the Internal Revenue Service says that, ordinarily, early cash withdrawals are subject to a 10 percent ​ early withdrawal penalty, in addition to income tax, if you remove cash from your IRA, 401(k) or 403(b) retirement account. Congress put the penalty in place to discourage you from drawing down your retirement accounts before you retire.

Under the Cares Act, however, if you experience financial hardship that relates to the pandemic, the IRS waives the 10 percent​ penalty for distributions ​up to $100,000​. The waiver covers withdrawals made in 2020.

In addition, your hardship withdrawal is not subject to the federal requirement that your financial institution withholds 20 percent of your withdrawn retirement funds to cover taxes. Instead, you have up to ​three years​ to pay those taxes on your withdrawal.

403(b) Loan Term Extension

If your employer lets you borrow from their retirement plan, the CARES Act has increased the limit of that withdrawal ​from $50,000 to $100,000​. In addition, you can defer your payments on new and existing loans for a year. While interest will continue to accrue, the loan's term can be extended to account for a three-year payment pause.

403(b) Borrowing Limit Increase

Another 403(b) IRS provision lets you borrow up to ​100 percent ​of the account's vested amount, which is the portion of your retirement fund that belongs to you, rather than that contributed by your employer. The CARES Act waives the rule that limits the amount you borrow to ​50 percent​ of your fully vested balance or ​$50,000​, whichever sum is less.

403(b) Waiver Recipients

The CARES Act says the U.S. Treasury Department determines who is eligible for pandemic-related benefits. The IRS says you're covered if you contract COVID-19 and if you experience adverse financial consequences due to being quarantined, furloughed or laid off, or if you have your work hours reduced.

Under the Cares Act, those adverse effects also include:

  • The inability to work due to a lack of child care
  • The closure or reduced hours of a business
  • A reduction in self-employment income

Upon its issue of Notice 2020-50, the IRS expanded the group eligible for pandemic-related benefits to include any member of a household who lost a job or income, or whose job offer was rescinded as an effect of the coronavirus. Also, it applies to one whose job start date is delayed. Affected household members may include the worker, spouse, live-in partner or adult child who share the principal residence.

Read More​: Can You Roll Over a 403b?

Employer Treatment of Early 403(b) Cash-Out

It's important to note that it's optional for an employer to adopt the distribution and loan rules of the CARES Act Section 2202. The IRS says an employer may "choose whether, and to what extent, to amend its plan to provide for coronavirus-related distributions and/or loans that satisfy the provisions of section 2202 of the CARES Act." This means an employer may provide for coronavirus-related distributions but leave its plan loan provisions or loan repayment schedules intact.

By issuing Notice 2020-50, the IRS made it possible for those affected by the economic effects of the COVID-19 pandemic to access their retirement money and ease the financial burden of the disease. The IRS has made it possible for a worker or business owner to "self-certify" that their 403(b) distribution was qualified.