You pay taxes on a 403(b) plan when you take money out, not when you contribute or while the account grows. For a traditional pre-tax 403(b), every dollar you withdraw counts as ordinary income in the year you receive it, and if you’re under 59½, you generally owe an additional 10% tax on top of regular income tax. A Roth 403(b) works in reverse: you pay tax on contributions up front, and qualified withdrawals come out tax-free.
Why the Tax Is Deferred Until Withdrawal
A 403(b) is a retirement plan for employees of public schools, churches, and organizations recognized as tax-exempt under Section 501(c)(3) of the Internal Revenue Code.1Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans Traditional contributions come out of your paycheck before federal and state income taxes are calculated, which lowers your taxable income for that year. Earnings inside the account also go untaxed year to year. Nothing is forgiven, though. The IRS collects when you eventually withdraw the money, and by then both the contributions and all the growth are taxable.
Taxes on Withdrawals After Age 59½
Once you reach 59½, you can take distributions from a traditional 403(b) without owing the 10% early withdrawal tax.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Regular federal income tax still applies to the full amount, because none of the balance has ever been taxed.
Your rate depends on your total taxable income and filing status for the year. If distributions, Social Security, and other income put you in the 22% or 24% bracket, roughly a quarter of each withdrawal goes to the federal government. Most states also tax 403(b) distributions as income, though a handful of states have no income tax. A large withdrawal in a single year can push you into a higher bracket than your other income alone would.
Taxes on Early Withdrawals Before 59½
Taking money out early creates two taxes at once. You owe regular income tax on the distribution, plus an additional 10% tax under 26 U.S.C. § 72(t).3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts For a traditional pre-tax 403(b), the 10% applies to the entire distribution, because the entire distribution is included in your gross income.
Say you pull $10,000 from your 403(b) at age 45 and your federal rate is 22%. You’d owe $2,200 in income tax and another $1,000 as the early withdrawal tax, leaving $6,800 before any state tax. You report the additional 10% tax on Form 5329 when you file.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
Situations That Skip the 10% Tax
Several exceptions let you take an early distribution without the extra 10%, though regular income tax still applies. The main ones:
- Separation from service in or after the calendar year you turn 55. Qualified public safety employees of state or local governments may qualify at 50 or after 25 years of service, whichever comes first.4Internal Revenue Service. Topic No. 558, Additional Tax on Early Distributions From Retirement Plans Other Than IRAs
- Total and permanent disability.5Internal Revenue Service. Retirement Topics – Disability
- Substantially equal periodic payments based on life expectancy, sometimes called 72(t) payments. Once started, they generally must continue for at least five years or until you reach 59½, whichever is later. For a 403(b), you must have separated from the employer before the payments begin.6Internal Revenue Service. Substantially Equal Periodic Payments
- Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Distributions made after a physician certifies you are terminally ill.
- Victims of domestic abuse by a spouse or domestic partner, starting in 2024, up to the lesser of $10,000 or 50% of the account balance.2Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Qualified disaster distributions, up to $22,000, if you live in a federally declared disaster area. Income can be spread over three tax years, and repaying the distribution within three years eliminates the tax.7Internal Revenue Service. Access Retirement Funds in a Disaster
Other exceptions cover certain court-ordered distributions, IRS levies, and military reservists called to active duty. Each requires specific documentation.
Roth 403(b) Withdrawals
Many plans now offer a designated Roth account. You contribute after-tax dollars, and qualified distributions, including all the earnings, come out entirely tax-free.8Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts
A Roth 403(b) distribution is qualified only if two things are true: at least five tax years have passed since your first Roth contribution to that plan, and you’re 59½ or older, disabled, or the distribution goes to your beneficiary after your death.8Internal Revenue Service. Retirement Plans FAQs on Designated Roth Accounts If you withdraw before meeting both conditions, your own contributions come out tax-free, but the earnings portion is taxed as ordinary income and may be hit with the 10% early withdrawal tax.9Internal Revenue Service. Publication 571 (01/2026), Tax-Sheltered Annuity Plans (403(b) Plans)
Required Minimum Distributions at Age 73
You cannot leave money in a traditional 403(b) forever. Required Minimum Distributions (RMDs) start in the year you turn 73.10Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs You can delay the first one until April 1 of the following year, but then you’d owe two RMDs in that second year, which often means a larger tax bill. Every RMD after the first is due by December 31. Under the SECURE 2.0 Act, the starting age moves to 75 beginning in 2033.
Each RMD is taxed as ordinary income at your rate for the year. The amount is your prior-year December 31 balance divided by a life expectancy factor from IRS tables. If you’re still working for the employer that sponsors the plan and own no more than 5% of the organization, you may be able to delay RMDs from that specific plan until you actually retire.
Miss the deadline and you owe an excise tax of 25% of the shortfall.11Office of the Law Revision Counsel. 26 USC 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans That rate drops to 10% if you fix the shortfall within the correction window, which generally runs through the end of the second tax year after the year the penalty was imposed.10Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs The IRS may waive the excise tax entirely if the shortfall came from a reasonable error and you’re taking steps to correct it; you request the waiver on Form 5329 with a written explanation.
Rollovers: Moving the Money Without Paying Tax
Rolling a 403(b) balance into another eligible plan, such as a traditional IRA, a new 401(k), or another 403(b), generally triggers no tax if the funds move directly between plans.12Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans No withholding applies to a direct rollover.
An indirect rollover is different. If the check comes to you, the plan administrator must withhold 20% of the taxable amount for federal taxes.13Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions You then have 60 days to deposit the full pre-withholding amount into the new account. Deposit only the 80% you actually received, and the missing 20% counts as a taxable distribution, along with the 10% early withdrawal tax if you’re under 59½.
You can also roll a traditional 403(b) into a Roth IRA, but the taxable portion of the rollover is included in your income for that year.12Internal Revenue Service. Topic No. 413, Rollovers From Retirement Plans A large conversion can push you into a higher bracket, which is why many people spread conversions across several years. The 10% early withdrawal tax does not apply to the converted amount as long as it lands in the Roth IRA.
Loans and Hardship Withdrawals
A 403(b) loan is not taxed as long as you repay it within five years and make at least quarterly payments.14Internal Revenue Service. Retirement Topics – Loans Miss a payment or fail to repay the balance and the outstanding amount becomes a “deemed distribution,” taxed as ordinary income, plus the 10% early withdrawal tax if you’re under 59½.15Internal Revenue Service. Retirement Plans FAQs Regarding Loans Leaving your employer with an outstanding loan can trigger the same result. If the loan is offset because you left the job or the plan terminated, you get an extended deadline to roll that amount into another eligible plan, running through your tax filing due date (including extensions) for the year of the offset, rather than the usual 60 days.16Internal Revenue Service. Plan Loan Offsets
A hardship distribution is not a loan and is not repaid. The full amount is taxed as ordinary income in the year you receive it, and if you’re under 59½, the 10% early withdrawal tax generally applies too.3Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts Because hardship distributions cannot be rolled over, the default federal withholding is 10%, not the 20% that applies to rollover-eligible distributions. You can adjust the withholding using Form W-4R.17Internal Revenue Service. Pensions and Annuity Withholding The 10% withheld often won’t cover your full bill once the early withdrawal tax is added.
Taxes for Beneficiaries Who Inherit a 403(b)
A beneficiary who inherits a traditional 403(b) owes income tax on any pre-tax distributions received, at their own rate for the year of withdrawal.18Internal Revenue Service. Retirement Topics – Beneficiary The 10% early withdrawal tax does not apply to inherited account distributions, regardless of the beneficiary’s age.
Under the SECURE Act, most non-spouse beneficiaries must withdraw the entire inherited balance by the end of the tenth year after the original account holder’s death.18Internal Revenue Service. Retirement Topics – Beneficiary If the original owner had already begun RMDs before dying, the beneficiary must also take annual distributions in years one through nine, with the remainder due by the end of year ten. If the owner died before RMD age, only the full withdrawal by year ten is required. Draining a large account across ten years can push a working beneficiary into a higher bracket, so spreading withdrawals evenly often reduces the total tax paid.
Some beneficiaries are exempt from the 10-year rule and can stretch distributions over their own life expectancy. These “eligible designated beneficiaries” include a surviving spouse (who can also roll the account into their own retirement account), minor children of the account holder (until they reach the age of majority, when the 10-year clock starts), disabled or chronically ill individuals, and anyone not more than 10 years younger than the deceased.18Internal Revenue Service. Retirement Topics – Beneficiary Every distribution any beneficiary takes is taxed as ordinary income in the year received. For an inherited Roth 403(b), qualified distributions are generally tax-free as long as the original five-year holding period was met before the account holder’s death.