403(b) Retirement Plan Tax Rules

There are ranges of 403(b) retirement plan tax rules. We cover what you need to know below.

403(b) Plans and Tax Deferral

403(b) plans are tax-deferred. That means that contributions you make are pre-taxed and grow tax-free until you begin to withdraw them. At that time, they're taxed as ordinary income.

If you are separated from service, you can begin withdrawing funds, without penalty, at age 59½. Once you reach age 72, there are minimum withdrawals you must take known as required minimum distributions (RMDs).

If you’d like to understand what you need to withdraw in retirement, see our RMD calculator

403(b) Plans and Filing Federal Taxes

You don’t need to report your 403(b) plan contributions separately on your federal tax return. Your employer will report your contributions on your W-2.

Because the funds are tax-deferred, your 403(b) plan contributions won’t be taxed as part of your federal taxes.

Once you start withdrawing your funds in retirement, your contributions and any associated earnings will be reported as ordinary income.

403(b) and State Income Tax

Just as with federal taxes, you don’t need to report your 403(b) plan contributions separately on your state tax return, and you won’t be taxed on your contributions until they’re withdrawn in retirement.

When withdrawing funds in retirement, because those funds are taxed as ordinary income, you will need to pay state taxes if you live in a state that collects state income tax.

403(b) Tax Penalty on Early Withdrawal

If you withdraw money from your 403(b) plan before age 59½, you will need to pay a 10% early withdrawal penalty in addition to the income tax you’ll pay on the withdrawal.

403(b) Taxes at Retirement

You’ll pay both federal and state income taxes on your contributions once you start to withdraw your funds in retirement. If you live in a state without state income tax, you won’t pay state taxes.

All retirement plan withdrawals are taxed as ordinary income, so any proceeds from the account will be taxed at the standard rate.

Questions?

If you have questions about 403(b) plans and taxes, contact us.

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