What happens with 403b early withdrawal from previous employer? Tax implications?

The good news is that an early withdrawal from your 403b is a one-time tax hit, not something you'll pay taxes on year after year. However, there are a few things to consider. When you take an early withdrawal, your plan administrator will typically withhold 20% for federal taxes, but that might not cover your actual tax liability. The withdrawal gets added to your taxable income for the year, which could potentially push you into a higher tax bracket. Plus, depending on your state, you might owe state income taxes on top of federal taxes. The 10% early withdrawal penalty is separate from the income tax and applies if you're under 59½ (with some exceptions). So while the withholding might be around 30%, your actual tax burden could be higher or lower depending on your total income for the year. You'll settle up when you file your tax return for the year of withdrawal.

I went through something similar last year with an old 403b worth about $9k. I was hesitant to cash it out but needed the money for some home repairs. I found this service called taxr.ai (https://taxr.ai) that really helped me understand exactly what the tax implications would be before I made the decision. You upload your retirement plan documents and income info, and they show you exactly what you'd owe in federal and state taxes, plus any penalties. They even showed me that in my case, the withdrawal would push me into a higher tax bracket for part of the amount, which wasn't obvious to me beforehand. Saved me from a nasty surprise at tax time!

Just wanted to follow up and say I actually tried taxr.ai after my skeptical comment. I'm honestly impressed. I was planning to withdraw about $12k from my old 403b and was just going to accept the penalty, but they showed me that I qualified for a hardship exemption based on some medical expenses I had last year. Completely legitimately avoided the 10% penalty, which saved me $1,200 right there. They also helped me understand how much I should withhold beyond the automatic 20% based on my specific tax situation. Definitely worth it for me.

If you're really concerned about how this withdrawal will affect your taxes, you might want to talk directly with an IRS agent. I know that sounds horrible (I used to spend HOURS on hold), but I recently discovered this service called Claimyr (https://claimyr.com) that gets the IRS to call YOU instead of waiting on hold. You can see how it works here: https://youtu.be/_kiP6q8DX5c I used it last month when I had questions about an early 401k withdrawal. Within 20 minutes I was talking to an actual IRS agent who walked me through my specific situation and confirmed exactly what I'd owe. They even pointed out a form I needed to file that I had no idea about. Saved me from potentially getting a notice later.

I have to eat my words again! After being skeptical about Claimyr, I decided to try it because I had more questions after my 403b withdrawal. I was connected to an IRS agent in about 25 minutes (compared to the 2+ hours I spent on hold last time I called them directly). The agent confirmed exactly what would be reported on my 1099-R form and walked me through which additional forms I needed to file with my 2025 return. They also confirmed I qualified for a hardship exception based on medical expenses exceeding 7.5% of my AGI. The agent even told me exactly which documentation to keep in case of an audit. Definitely worth it just for the time saved alone!

One thing to consider is rolling over to an IRA instead of taking the cash. You avoid all taxes and penalties that way. I did this with my old 403b and then just took distributions from the IRA as needed. Gives you more flexibility and control. Plus, once it's in an IRA, you actually have more hardship withdrawal options if you really need the money later. Things like first-time home purchase, education expenses, etc. can qualify for penalty-free (though still taxable) withdrawals from an IRA.

Did anybody mention TSP loans? Since you're working for the federal government now, once you've been contributing to your TSP for a while, you can take loans from it without the tax penalties of an early withdrawal. Interest rates are pretty reasonable too, and you pay the interest to yourself. Might be something to consider for future needs rather than tapping retirement accounts and paying penalties.

Hey Freya! I was in a similar situation a couple years back with an old 403b from a teaching job. One thing I learned that might help - since you're now a federal employee, you might want to consider if you qualify for any of the hardship exceptions that could waive the 10% penalty. Things like unreimbursed medical expenses, higher education costs, or even certain unemployment situations can qualify. Also, don't forget about state taxes! Depending on which state you're in, you could owe anywhere from 0% to 10%+ on top of federal taxes. Some states don't tax retirement distributions at all, while others treat them as regular income. The partial rollover idea mentioned earlier is really smart too - you could roll most of it into your TSP (yes, you can roll a 403b into TSP!) and just take out what you absolutely need in cash. That way you minimize the tax hit while still getting some immediate funds. Just make sure to get everything in writing from your 403b administrator about exactly how much will be withheld and when you'll receive the funds. Some plans can take weeks to process distributions.