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Withdrawal from 403(b) before age 59 1/2
Old 04-12-2014, 07:33 PM   #1
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Withdrawal from 403(b) before age 59 1/2

A friend of mine who is 55 years old will be retiring from a school district in June and will begin collecting a pension at that time. She will then do occasional substitute teaching.

She would like to withdraw money from her 403(b) as soon as she retires. Under section 72 (t) of the IRS code it says that if she withdraws "substantially equal periodic payments" that she can avoid the 10% tax penalty, provided that she "Separates from Service." http://www.irs.gov/pub/irs-drop/rr-02-62.pdf

The problem is that she will not be separating from service, since she will be substituting.

My question is this: can she do a Rollover IRA and avoid the "Separation from Service" requirement and thus not have to pay the 10% tax penalty, since she plans to receive "substantially equal periodic payments?" I am hoping that someone on this board can answer that question. Any help or suggestions would be greatly appreciated.
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Old 04-12-2014, 08:33 PM   #2
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Sorry, I don't have an answer for your 403b question, but my comments are:
1. Has your friend checked with your pension system to determine if she can draw a pension while continuing to work for the school district. This is not allowed in some states.
2. Is the money in your friends 403(b) plan invested in an annuity? If so, she should check the annuity provider to determine the surrender period and the surrender penalties. In some cases, you will need to wait 7 years after contributing to avoid surrender penalties.
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Old 04-12-2014, 08:52 PM   #3
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Hi,

In Arkansas, it worked like this.

I withdraw from my 403b without the penalty because I was 56 when I retired. (monthly payments--the tax bite is painful, anyway)

Here teachers must wait 180 days before drawing pay from any state entity. I waited a year before doing any substituting. That was partly playing it safe and mostly resting enough to substitute. She should definitely check with her state's teacher retirement department for clarification.

I am very happy for your friend. : )
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Old 04-12-2014, 09:11 PM   #4
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My friend's 403 (b) is with AXA. It is not in any way associated with the state. She will be collecting CALSTRS, a California pension. In this state, you are allowed to earn up to $40,000 without losing any pension benefits.
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Old 04-13-2014, 12:06 PM   #5
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I looked at AXA's web site and their primary business seems to be annuities. Your friend needs to find out what the surrender period is for her annuity. Watch out for those annuity salesman - their 'fix' may be to sell you another annuity, which will restart the surrender period.
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Old 04-13-2014, 04:24 PM   #6
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The funds in the 403b with AXA are very high expense ratios. I would roll that over to a Vanguard IRA as soon as possible after she separates from the full-time job.
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Old 04-13-2014, 05:29 PM   #7
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Check out IRS Publication 575 (especially page 34). Age 55 is the "normal" retirement age for 403b and 401k. The local district will need to be consulted about the "separation" issue. When the plan is rolled to an IRA then 59 1/2 is the age with no 10% penalty.
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Old 04-18-2014, 08:59 PM   #8
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Quote:
Originally Posted by pjm-7 View Post
Check out IRS Publication 575 (especially page 34). Age 55 is the "normal" retirement age for 403b and 401k. The local district will need to be consulted about the "separation" issue. When the plan is rolled to an IRA then 59 1/2 is the age with no 10% penalty.

72t (SEPP) distributions avoid 10% penalty in an IRA continent on the specified rules etc


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Old 04-18-2014, 09:16 PM   #9
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Quote:
Originally Posted by Retire Soon View Post
A friend of mine who is 55 years old will be retiring from a school district in June and will begin collecting a pension at that time. She will then do occasional substitute teaching.

She would like to withdraw money from her 403(b) as soon as she retires. Under section 72 (t) of the IRS code it says that if she withdraws "substantially equal periodic payments" that she can avoid the 10% tax penalty, provided that she "Separates from Service." http://www.irs.gov/pub/irs-drop/rr-02-62.pdf

The problem is that she will not be separating from service, since she will be substituting.

My question is this: can she do a Rollover IRA and avoid the "Separation from Service" requirement and thus not have to pay the 10% tax penalty, since she plans to receive "substantially equal periodic payments?" I am hoping that someone on this board can answer that question. Any help or suggestions would be greatly appreciated.
There are two different concepts being combined here where they shouldn't be. One is that certain 403b plans allow penalty free withdrawals if one separates from service after age 55. The other is that irrespective of how old you are with you separate from service if you take SEPP withdrawals within the rules they are penalty free.

If your friend's 403b allows penalty free withdrawals if she is over 55 when she separates from service, then the question becomes if she then later does some substitute teaching for that school district, does it mess up the separation from service portion of that requirement? I don't know the answer but the 403b administrator should know. Also, could she alternatively just sub for a different school district if her plan is a problem?

If she really wants to sub in that school district and it messes up her taking penalty free withdrawals under the over 55 rule then she could then do SEPPs to avoid the 10% penalty.

YMMV.
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