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Why Can 401k People Withdraw And Not 403b People Prior To 59 1/2


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#1 Birmy

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Posted 18 January 2010 - 09:52 AM

I am a school teacher and can retire at age 57 with 30 years of service with a New York State pension. I read today in newspaper that a 401K can be accessed at age 55 without being socked with a 10% penalty for early withdrawal if you quit, retire or are fired. Dave Carpenter from the Associated Press wrote article entitled, "Benefits, like aches, increase with age". This early withdrawal interests me as my wife has a 401K and we always thought about the possible difficulty of getting from age 57 (my proposed retirement) to 59 1/2 (when we can access our retirement monies in the investment vehicles) if all of our money is in these retirement vehicles (401 and 403B).

Do you know if Congress has ever considered offering people with a 403B the same benefit as those with a 401K? Meaning, is there anything in the pipeline about allowing a 403B participant to access their money as early as age 55 without penalty if the person quits, retires or is fired? Clearly, if I retired at age 57 and a 403B was like a 401K I could start tapping into it without penalty.

Seems like this would give the 403B holder some nice flexibility in that you would not have to wait until age 59 and 1/2 to collect.

Any advice, thoughts or anything you can share would be greatly appreciated.


#2 DK

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Posted 18 January 2010 - 11:41 AM

You are allowed to withdraw from your 403(b) after 55 years old if you separate from service and retired. You will not have to pay any penalty if you do this.

#3 Birmy

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Posted 19 January 2010 - 09:57 PM

QUOTE(DK @ Jan 18 2010, 11:41 AM) View Post

You are allowed to withdraw from your 403(b) after 55 years old if you separate from service and retired. You will not have to pay any penalty if you do this.

Thank you. Is there a website where this is listed? It seems strange that I have always heard you cannot touch your 403B money until you are 59 and 1/2 and now you are telling me I can touch it as long as I am retired from teaching (or from the employer where I contributed all my 403B money).

As a NYS teacher I can retire at age 55 but with a penalty as I will not have 30 years of service. At age 57 I will have 30 years of service and can collect a full pension without penalty. That is why I seek definitive language that states just what you have told me "that I can withdraw my 403B money if I separate from service and retired after 55 years old."

If you know where I can find this statute in the 403B regulations I would love to see it for my own eyes. Thank you very much!!!

#4 Michael Devault

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Posted 20 January 2010 - 07:14 AM

It's in Internal Revenue Code section 72(t)(2)(A)(v). You can also find reference to it in IRS Pub 560, page 20, at the top of the second column.

Bear in mind that this exception is only available if you separate from service in or after the year in which you attain age 55. If you separate from service at age 53, for example, the exception does not apply two years later when you reach age 55.


#5 Admin

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Posted 20 January 2010 - 10:48 AM

Good to hear from you, Michael!
---
Birmy, from our FAQs

When am I eligible for a distribution from my 403(b)?
If you withdraw assets prior to age 59-1/2, the IRS will impose a 10 percent penalty tax, in addition to the normal tax consequences, unless you meet one of the following criteria:
Attain age 59-1/2
Separate from service in or after the year in which you reach age 55
Part of a series of substantially equal periodic payments for your life or the joint lives of you and your designated beneficiary
Hardship
Disability
Death
Made due to an IRS levy upon your participant account
Paid to an alternative payee under a qualified domestic relations order
Is a qualified reservist distribution as defined under the Pension Protection Act of 2006
Is a payment of qualified medical expenses greater than 7.2% of your adjusted gross income

Dan Otter

#6 sschullo

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Posted 20 January 2010 - 10:54 AM

Same here, good to hear from you Michael.
Trying to deal with the new regs and understand Bob Architect's decision to join that "thing" called a retirement plan company? The more things change the more they remain the same.
Welcome back,
Steve

#7 Birmy

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Posted 23 January 2010 - 10:40 AM

Thank you very much!!! This is very good news. I do not need to worry about a "non-retirement" cash bridge to get me from my retirement age of 57 to what I thought was the date I could access my 403B money (59 and 1/2.)

I can access my 403B money when I retire at age 57.

Many thanks.



#8 sschullo

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Posted 02 October 2010 - 07:17 PM

I hope people will see my question since I just registered today. I am a college professor who is 56 and who has a 403b with a vendor called Guidestone. Guidestone has announced that they are dropping the funding rate for their annuities starting January 1, 2011, from a floor of 6% (which they have had since the mid-1990s) to 3.5% with no floor. My 403b now has nearly $400,000 in it, which according to Guidestone would get me a monthly annuity of $2500 at the 6% rate. After the rate drop, the same-size account would take years for the annuity benefit to return to $2500 a month. I had been thinking of retiring early but not right now (age 56). Here are my questions:

Will the IRS let me close out my 403b for this $2500 monthly annuity and continue working full time at the same employer? (I know there's a 10% penalty for withdrawing from the 403b before age 59.5, but locking in the higher 6% funding rate from Guidestone seems to be a reason to do that. I would get $30,000 a year from the annuity along with my regular salary, if I am allowed to continue working full time. I know I would have to pay income tax on the whole amount (salary plus annuity) plus pay the 10% early withdrawal penalty on the $30,000, but it still seems as if the higher funding rate would make that something to look at seriously.)

If I am able to do this, the 10% penalty would stop when I turn 59.5. Is that also correct?


Hi Glenn,
Very happy you came here to discuss this before making a huge mistake with $400,000! Please correct me if I am wrong. Now based on your post this is my understanding of what you want to do. It may sound a little harsh, but I see red flags all over the place.
I don't know who is suggesting that you take all of our money and pay 10% penality. Who ever is is not looking out after you best interests. Besides, you cannot withdraw your 403b before 59.5, without separation from service or claiming with documentation of financial hardship, sickness or some other clamity. Even if you could close out your 403b account, it is a horrible idea. Thats a $40,000 penality! Yikes! Sounds like they are offering yet another annuity with the higher 6% carrot. Whats to stop the insurance company from changing the rate downward again? This what you give up when you sign on to an annuity--guidestone or any insurance company reserves the right to reset your max and mins as they see fit as they have already done.
I suggest that you think very hard about this. This is your life savings!
Let us know if there is something I missed about what you have, what has happened and what you want to do.
We are here to help you look out after your best interests.
Regards,
Steve

#9 Glenn

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Posted 03 October 2010 - 11:23 AM


I hope people will see my question since I just registered today. I am a college professor who is 56 and who has a 403b with a vendor called Guidestone. Guidestone has announced that they are dropping the funding rate for their annuities starting January 1, 2011, from a floor of 6% (which they have had since the mid-1990s) to 3.5% with no floor. My 403b now has nearly $400,000 in it, which according to Guidestone would get me a monthly annuity of $2500 at the 6% rate. After the rate drop, the same-size account would take years for the annuity benefit to return to $2500 a month. I had been thinking of retiring early but not right now (age 56). Here are my questions:

Will the IRS let me close out my 403b for this $2500 monthly annuity and continue working full time at the same employer? (I know there's a 10% penalty for withdrawing from the 403b before age 59.5, but locking in the higher 6% funding rate from Guidestone seems to be a reason to do that. I would get $30,000 a year from the annuity along with my regular salary, if I am allowed to continue working full time. I know I would have to pay income tax on the whole amount (salary plus annuity) plus pay the 10% early withdrawal penalty on the $30,000, but it still seems as if the higher funding rate would make that something to look at seriously.)

If I am able to do this, the 10% penalty would stop when I turn 59.5. Is that also correct?


Hi Glenn,
Very happy you came here to discuss this before making a huge mistake with $400,000! Please correct me if I am wrong. Now based on your post this is my understanding of what you want to do. It may sound a little harsh, but I see red flags all over the place.
I don't know who is suggesting that you take all of our money and pay 10% penality. Who ever is is not looking out after you best interests. Besides, you cannot withdraw your 403b before 59.5, without separation from service or claiming with documentation of financial hardship, sickness or some other clamity. Even if you could close out your 403b account, it is a horrible idea. Thats a $40,000 penality! Yikes! Sounds like they are offering yet another annuity with the higher 6% carrot. Whats to stop the insurance company from changing the rate downward again? This what you give up when you sign on to an annuity--guidestone or any insurance company reserves the right to reset your max and mins as they see fit as they have already done.
I suggest that you think very hard about this. This is your life savings!
Let us know if there is something I missed about what you have, what has happened and what you want to do.
We are here to help you look out after your best interests.
Regards,
Steve


Thanks, Steve. I need to clarify, but you still may be right that it is inadvisable. I wasn't going to withdraw the whole amount but rather use it to obtain a single-life annuity, which would (at the 6% rate Guidestone now offers, which must be locked-in by December 1) give me $2500 a month for the rest of my life. After January 1, the 6% floor that Guidestone has had since the mid-1990s for annuities won't exist anymore. I am single with no dependents, no siblings--so an annuity seems like something that might be good for me.

I want to know if I can keep working full time and do that. Is that simply not allowed by the government, or is the 10% penalty on the money withdrawn from the 403b the only impediment? With a $2500 monthly annuity, I would receive $30,000 a year. If I can still work full-time, I would also get my full salary to go with the $30,000, which means that paying the $3000 penalty (10% of $30,000) and the taxes on the salary plus the $30,000 annuity should still leave me better off than I am now with only the full-time salary and a 403b annuity option that is dropping after Jan. 1 to 3.5%.

#10 sschullo

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Posted 03 October 2010 - 12:27 PM

Hi Glenn,
You are fully aware of the old adage that when something is too good to be true, it is.

Here are my comments and questions:

As will all annuities, forget what the sales person says, you must read the fine print. The company will only do with is in the fine print. Look for max and min, "reset" schedule (most companies allow themselves to do this annually).
Is a sales person telling you that you have to change with the time pressure of December 1st or else?
How in the world can $30,000 return to you $2500 a month?
What are the costs in terms of tying up your money for how many years? How much in commissions does the sales person get?
What if the company "resets" the payout again at a lower rate? Its in the fine print. NEVER listen to the sales person.
I am very sure that the 6% they are offering has a short time line. Very few bond funds are paying anywhere near 6%. The insurance company has to make more than that to pay you and make money for themselves. They will not pay you more than get for very long. Check this out!
What is also interesting is why do they require you to take out some money to get into this annuity. Why don't they simply transfer the 30,000 from the old annuity into this new annuity?

This conversation is really moot because you cannot touch your 403b before 59.5. Unless you terminate employment from your employer. But its good experience for others to learn how insurance companies sales high priced products.

If you want to purchase another annuity look into TIAA CREF or Vanguard. Remember sales people hate these companies because they are low cost and there is no commissions.

You have $400,000 your life savings and there will be a lot of sharks salivating who do NOT have your best interests in mind. They know exactly what your want and will ex ploit your concerns about "losing money" as they have the "perfect" product for you, a seemingly and very attractive riskless product which pays more than the market can pay. But their product is not so riskfree when you look at the fine print and what you have to agree with.

I urge you to read Dan Otter's book, Teach and Retire Rich, you can get it right off this website. Its only ten bucks but it would be well worth it to you to learn that the financial 403b annuity world out there is only looking out for their best interests, not yours. Thats their right, but you have a right to look after your best interests. When you learn a little more about finances and investing, you will learn to take care of your best interests. And you will learn to find a fee only adviser, the one that you pay by the hour to give you objective information not only to address your current situation, but how you want to use your life savings in retirement.

Please continue with this important conversation and I will get off my box,
Regards,
Steve