Is a 403(b) Taxable? Contributions, Withdrawals, and RMDs

Yes, a 403(b) is taxable, but usually not until you take money out. Contributions to a traditional 403(b) come out of your paycheck before income tax, so you pay tax later when you withdraw. Roth 403(b) contributions are taxed upfront, so qualified withdrawals come out tax-free. Employer matching money is always pre-tax going in and taxable coming out. Investment growth inside the account is not taxed while it stays there.

That’s the short answer. The longer answer depends on which bucket the dollars came from, how old you are when you withdraw, and why you’re taking the money.

The Three Buckets Inside Your Account

Every dollar in a 403(b) sits in one of three categories, and the category controls the tax outcome.

Traditional (pre-tax) contributions are deducted from your paycheck before federal and state income taxes are calculated, which lowers your taxable income the year you contribute. The trade-off: every dollar you withdraw later, including investment earnings, is taxed as ordinary income.

Roth (after-tax) contributions come out of your paycheck after taxes have already been withheld, so you get no upfront break. In return, qualified withdrawals of both contributions and earnings are completely tax-free.

Employer contributions, whether matching or nonelective, are always treated as pre-tax money, even if you personally make Roth contributions. You never paid tax on these dollars going in, so they’re fully taxable coming out.¹

A single 403(b) account can hold all three types at once. Your plan administrator tracks them in separate sub-accounts so the right tax treatment applies to each withdrawal.

Growth Inside the Plan Is Not Taxed

While your money stays in the 403(b), you owe nothing on dividends, interest, or capital gains the investments produce. This is true for both the traditional and the Roth portions. Money that would otherwise go to annual taxes stays invested and earns its own returns. The tax question only comes up when dollars actually leave the plan.²

Withdrawing Traditional 403(b) Money

Distributions from the traditional side of a 403(b) are taxed entirely as ordinary income. The full amount, both your original contributions and any investment growth, gets added to your adjusted gross income for the year you receive the distribution. Employer matching dollars work the same way.¹

Because the distribution counts as ordinary income, it’s taxed at your marginal rate for that year. A large withdrawal can push you into a higher bracket, which is why many retirees spread distributions across multiple years or coordinate them with other income.

Withdrawing Roth 403(b) Money

Roth distributions are either fully tax-free or partially taxable, depending on whether they qualify. Two conditions must both be satisfied for a qualified distribution:

You are at least 59½, or the distribution is made because of disability or death.
At least five tax years have passed since January 1 of the year you first made a Roth contribution to that plan.

When both conditions are met, the entire withdrawal, including all accumulated earnings, is excluded from gross income.³

If a Roth distribution is non-qualified, the portion representing your own contributions still comes out tax-free since you already paid tax on it. The earnings portion is taxed as ordinary income. This split matters most for people who withdraw from a Roth 403(b) before 59½ or within the first five years of the account’s existence.⁴

Early Withdrawals and the 10% Penalty

Any distribution taken before age 59½ is considered early. If it comes from the traditional or employer side, you owe ordinary income tax on the full amount plus a 10% additional tax. The penalty applies to the taxable portion, so a non-qualified early Roth withdrawal would trigger the 10% only on the earnings, not on your original contributions.⁵

Situations That Waive the Penalty

Several situations remove the 10% penalty, though the underlying income tax on traditional dollars still applies:

Leaving your job in or after the year you turn 55 (age 50 for public safety employees of state or local governments), for distributions from that employer’s plan.
Total and permanent disability, or distributions to a beneficiary after your death.
Unreimbursed medical expenses exceeding 7.5% of your adjusted gross income.
Terminal illness certified by a physician.
Qualified birth or adoption expenses, up to $5,000 per child.
A series of substantially equal periodic payments based on your life expectancy, continued for at least five years or until 59½, whichever comes later.
Domestic abuse survivors can withdraw the lesser of $10,000 (indexed) or 50% of the balance, with three years to repay.
Emergency personal or family expenses, up to $1,000 per year, with restrictions on taking another until the first is repaid or replaced by new contributions.⁵

Hardship Withdrawals Are Different

A hardship withdrawal is not the same as a penalty exception. It lets you pull money out while still employed if you have an immediate and heavy financial need, limited to the amount needed to satisfy that need. The withdrawal is taxed as ordinary income, and it does not automatically avoid the 10% penalty. Unless your situation independently fits one of the exceptions above, the penalty applies on top of the income tax.⁶

Loans That Turn Into Taxable Distributions

Many 403(b) plans let you borrow from your own account. The maximum loan is the lesser of $50,000 or 50% of your vested balance, generally repaid within five years with at least quarterly payments. While you’re paying on time, there’s no tax event.⁷

Default is where the tax trouble begins. If you miss payments or leave your employer with an outstanding balance, the unpaid amount becomes a deemed distribution. The IRS treats it as a taxable withdrawal. You owe ordinary income tax on the full outstanding balance, and if you’re under 59½, the 10% penalty applies too. This catches people off guard when they change jobs.⁸

Rollovers Don’t Trigger Tax If You Do Them Right

Rolling a 403(b) into another eligible retirement plan or an IRA is not a taxable event when handled correctly. A direct rollover, where the plan sends the funds straight to the receiving account, avoids both income tax and withholding.⁹

An indirect rollover, where you receive the check first, is riskier. Your plan must withhold 20% for federal taxes. To complete the rollover and avoid taxation on the full amount, you have to deposit the entire original balance into the new account within 60 days, replacing the withheld 20% out of your own pocket. Miss the deadline and the whole distribution becomes taxable, potentially with the 10% penalty on top.¹⁰

Roth Conversions

Converting traditional 403(b) money into a Roth IRA is taxable. The entire pre-tax amount you convert is added to your ordinary income for that year. No penalty applies regardless of your age, but the income tax bill can be large if you convert a lot at once. If you’re at the RMD stage, you also have to take the year’s required minimum distribution before converting the rest.

Required Minimum Distributions

Traditional 403(b) accounts are subject to required minimum distributions starting in the year you turn 73. If you’re still working for the plan sponsor, some plans let you delay RMDs until you actually retire.¹¹

Roth 403(b) accounts are not subject to RMDs during the original owner’s lifetime. Your Roth money can stay invested and growing tax-free for as long as you live.¹²

Miss an RMD and you owe an excise tax of 25% on the shortfall. Catch the mistake and withdraw the missed amount within the IRS correction window, and the penalty drops to 10%.

What Happens When a 403(b) Is Inherited

The tax treatment of an inherited 403(b) depends on the beneficiary’s relationship to the deceased and when the death occurred.

A surviving spouse has the most options. Spouses can roll the inherited account into their own IRA or retirement plan, effectively treating it as their own, which resets the RMD timeline and preserves tax-deferred growth. A spouse can also keep the inherited account and take distributions based on their own life expectancy.¹³

Most non-spouse beneficiaries who inherited from someone who died on or after January 1, 2020, must empty the account by December 31 of the tenth year following the owner’s death. If the original owner died before their required beginning date, there are no required annual withdrawals inside that window, so you can time the distributions to manage taxes. If the owner died after their required beginning date, annual minimum distributions are required during the 10-year period.

A narrow group of “eligible designated beneficiaries” can stretch distributions over their own life expectancy instead of using the 10-year rule. This group includes minor children of the deceased (until they reach the age of majority, at which point the 10-year clock starts), disabled or chronically ill individuals, and beneficiaries no more than 10 years younger than the deceased.¹³

Whatever the schedule, the underlying tax rules stay the same: traditional dollars are fully taxable as ordinary income, and Roth dollars are tax-free if the original owner’s account met the five-year holding period.

State Income Tax

Federal tax is only part of the bill. Most states tax 403(b) distributions as ordinary income, with rates ranging from roughly 2% to over 13%. Nine states have no personal income tax, so residents of those states owe no state tax on 403(b) withdrawals. A handful of others exempt some or all retirement income even though they tax wages.

Where you live when you take the distribution is what matters, not where you worked when you earned the money. Retirees who move to a no-income-tax state before beginning withdrawals can avoid state taxation on the entire balance, provided they follow their former home state’s residency rules.

How Contributions and Distributions Show Up on Tax Forms

Your contributions appear on Form W-2 in Box 12. Traditional elective deferrals use code E; designated Roth contributions use code BB. Traditional deferrals are excluded from the taxable wages in Box 1, while Roth contributions stay in Box 1 because they were made after tax.¹⁴

Distributions come to you on Form 1099-R. Box 1 shows the gross distribution, Box 2a shows the taxable amount, and Box 7 carries a distribution code that tells you and the IRS how to treat the withdrawal. Common codes:

Code 1: early distribution, no known exception (10% additional tax likely applies).
Code 2: early distribution with an exception, such as separation from service at 55.
Code 7: normal distribution, participant at least 59½.
Code B: distribution from a designated Roth account.
Code G: direct rollover to an eligible retirement plan.

Codes can appear in combination. A normal Roth distribution, for example, might carry both 7 and B. The figures from your W-2 and 1099-R flow onto Form 1040. If a code or amount looks wrong, contact your plan administrator before filing rather than trying to correct it on the return.¹⁵

1
Internal Revenue Service. Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
2
Internal Revenue Service. IRC 403(b) Tax-Sheltered Annuity Plans
3
Internal Revenue Service. Retirement Topics – Designated Roth Account
4
GovInfo. 26 USC 402A – Optional Treatment of Elective Deferrals as Roth Contributions
5
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
6
Internal Revenue Service. Hardships, Early Withdrawals and Loans
7
Internal Revenue Service. Retirement Topics – Loans
8
Internal Revenue Service. Deemed Distributions – Participant Loans
9
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
10
eCFR. 26 CFR 31.3405(c)-1 – Question and Answer Relating to Withholding on Eligible Rollover Distributions
11
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
12
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
13
Internal Revenue Service. Retirement Topics – Beneficiary
14
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
15
Internal Revenue Service. Instructions for Forms 1099-R and 5498