When Do You Pay Taxes on a 403(b) Plan?

You pay taxes on a 403(b) at different moments depending on which type you have. With a traditional 403(b), your contributions and any employer match go in untaxed, grow untaxed, and are taxed as ordinary income when you withdraw them. With a Roth 403(b), you pay income tax on the money in the year you earn it, and qualified withdrawals later are tax-free. Withdrawing before age 59½ generally adds a 10% penalty on top of the income tax, and the IRS eventually forces withdrawals from traditional accounts through required minimum distributions.

Traditional vs. Roth: When the Tax Actually Hits

A traditional 403(b) contribution comes out of your paycheck before federal and state income tax is calculated. If you earn $60,000 and contribute $10,000, the IRS only sees $50,000 of taxable income for that year.¹ That deferred money keeps growing untaxed inside the account. You pay income tax on every dollar, contributions and earnings alike, when it comes out.

One thing pre-tax does not skip: Social Security and Medicare. Your 403(b) deferral reduces income tax withholding, but the full salary is still subject to FICA.²

A Roth 403(b) flips the timing. You contribute after-tax dollars, so your full salary stays subject to income tax and FICA in the year you earn it. There is no upfront break. In exchange, qualified withdrawals, including all investment growth, come out completely tax-free if you are at least 59½ and the Roth account has been open for at least five tax years.³ The five-year clock starts on January 1 of the first year you contributed to that plan. If you opened your Roth 403(b) at 57, the earnings side is not fully tax-free until you turn 62, even though you cleared 59½ two years earlier.

Employer contributions to a traditional 403(b) also go in tax-free and are not subject to FICA, and you pay ordinary income tax on them when withdrawn.² Under SECURE 2.0, some plans now let employers designate matching contributions as Roth. If yours does and you elect it, that match is taxable income in the year it is contributed and reported on Form 1099-R, but its future growth becomes part of your tax-free Roth balance.⁴

Withdrawals After Age 59½

Age 59½ is when the deferred taxes on a traditional 403(b) finally come due. Every dollar you withdraw is ordinary income for that year, taxed at the federal rate that applies to your bracket, currently between 10% and 37%.⁵ The bracket system taxes your income in layers, not at a single flat rate on the whole withdrawal.

Timing matters here. A large lump-sum withdrawal can push you into a higher bracket for the year, while spreading withdrawals across several years keeps more of the money in lower brackets. If you also collect Social Security, remember that 403(b) distributions count as income that can make a larger share of your benefits taxable.

Roth 403(b) qualified withdrawals after 59½ (once the five-year rule is satisfied) are entirely tax-free, including decades of earnings.³ That gives you a lever for managing your bracket in retirement, since pulling from the Roth side does not add to your taxable income.

Withdrawals Before Age 59½

Take money out of a 403(b) early and two costs stack. The distribution is taxed as ordinary income (for a traditional account), and the IRS adds a 10% early withdrawal penalty.⁶ If you are in the 22% bracket, that is roughly 32% of the withdrawal going to the IRS.

For an early Roth 403(b) withdrawal that does not meet the qualified rules, the portion representing your own contributions comes back tax-free because you already paid tax on it. The earnings portion is taxed as ordinary income and may also face the 10% penalty.

Exceptions That Waive the 10% Penalty

Several situations remove the 10% penalty, though income tax on traditional-account withdrawals still applies:

Separation from service in or after the year you turn 55: withdrawals from that employer’s 403(b) are penalty-free. This does not extend to accounts left with a prior employer or rolled into an IRA.⁶
Total and permanent disability.
Substantially equal periodic payments based on your life expectancy, which must continue for at least five years or until you reach 59½, whichever is later.⁷
Unreimbursed medical expenses above 7.5% of your adjusted gross income.

Hardship Distributions Are Not a Tax Break

Some 403(b) plans allow hardship withdrawals for immediate and heavy financial needs, with IRS safe-harbor categories that include medical expenses, buying a principal residence, tuition and room and board, preventing eviction or foreclosure, funeral expenses, and certain home repairs.⁸ A hardship withdrawal is still fully taxable as ordinary income and is generally still subject to the 10% penalty if you are under 59½. The label lets you access the money; it does not change the tax treatment.

Required Minimum Distributions

Even if you never touch your 403(b) voluntarily, the IRS eventually forces you to. Required minimum distributions collect the tax that has been deferred for decades. The starting age is 73 for most current retirees.⁹ Under SECURE 2.0, that age rises to 75 for people who reach 74 after December 31, 2032, which generally means those born in 1960 or later.

Each year’s RMD is the prior year-end balance divided by a life expectancy factor from IRS tables. Your first RMD must be taken by April 1 of the year after you reach the applicable age, and by December 31 every year after that. Miss the deadline and the IRS imposes an excise tax of 25% on the amount you should have withdrawn, dropping to 10% if you correct the shortfall within two years.⁹

Two exceptions matter. If you are still working for the employer that sponsors your 403(b) when you hit RMD age, you can delay RMDs from that specific plan until the year you actually retire, unless you own more than 5% of the sponsoring organization. The delay does not extend to accounts held at a former employer or rolled into an IRA.⁹

The second exception: starting in 2024, designated Roth accounts inside a 403(b) are no longer subject to RMDs during the account owner’s lifetime.⁹ A Roth 403(b) can keep growing untouched for the rest of your life. Beneficiaries still face distribution rules after your death.

Rollovers, Conversions, and Loan Defaults

Moving money out of a 403(b) is common when you change jobs. Whether it triggers taxes depends on how you move it.

A direct rollover sends funds straight from your 403(b) to another eligible plan or IRA. Nothing is withheld, nothing is reported as income, because the money never becomes a distribution to you.¹⁰

An indirect rollover, where the check is paid to you, works differently. The plan is required to withhold 20% for federal income tax before cutting the check.¹¹ You then have 60 days to deposit the full original amount, including the withheld 20%, into another eligible plan or IRA.¹⁰ If you only roll over the 80% you received and cannot cover the missing 20% from other funds, that shortfall is treated as a taxable distribution and may face the 10% early withdrawal penalty.

Rolling a traditional 403(b) into a Roth IRA is a taxable conversion. The entire converted amount is added to your gross income and taxed at your regular rate.¹⁰ There is no 10% penalty on the conversion itself, regardless of your age, but the tax bill on a large balance can be substantial. Converting in stages over several years can keep you out of a much higher bracket.

Plan loans have their own tax trap. As long as you repay on schedule, borrowing from your 403(b) has no tax consequence. If you leave your job or default on payments, the outstanding balance is treated as a taxable distribution.¹² If you are under 59½, the 10% penalty applies as well. When the default happens because you were separated from service, you generally have until the tax filing deadline for that year, including extensions, to roll the loan offset amount into another plan or IRA and avoid the tax.

Inherited 403(b) Accounts

When a 403(b) owner dies, beneficiaries include any taxable distributions they receive in their own gross income.¹³ How quickly the money has to come out depends on who inherits it:

A surviving spouse can roll the account into their own 403(b) or IRA and treat it as their own, delaying distributions and the tax on them until their own RMD age.
Eligible designated beneficiaries, meaning minor children, disabled or chronically ill individuals, and people no more than 10 years younger than the deceased, can stretch distributions over their own life expectancy.¹³
Other individual beneficiaries fall under the SECURE Act’s 10-year rule: the account must be emptied by the end of the tenth year after the year of the owner’s death, with each withdrawal from a traditional account taxed as ordinary income. Bunching all withdrawals into one year near the deadline is usually the most expensive way to do it.¹³

Beneficiaries of a Roth 403(b) face the same distribution timelines, but qualifying distributions remain tax-free.

State Income Taxes

Federal rules only cover half the picture. State income taxes apply to 403(b) distributions in most states. A handful of states have no income tax at all, so distributions there are state-tax-free. Others tax retirement income in full. Many fall in between, offering partial exclusions tied to age or household income. If you are considering relocating in retirement, comparing how your current and prospective states treat retirement distributions is worth doing before you commit.

1
Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
2
Internal Revenue Service. Are Retirement Plan Contributions Subject to Withholding for FICA, Medicare, or Federal Income Tax
3
Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
4
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
5
Internal Revenue Service. Federal Income Tax Rates and Brackets
6
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
7
Internal Revenue Service. Substantially Equal Periodic Payments
8
Internal Revenue Service. Retirement Topics – Hardship Distributions
9
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
10
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
11
eCFR. 26 CFR 31.3405(c)-1 Withholding on Eligible Rollover Distributions
12
Internal Revenue Service. Plan Loan Offsets
13
Internal Revenue Service. Retirement Topics – Beneficiary