How Much Tax Is There When Withdrawing a 403(b)?

Teachers often have 403(b) plans.

Teachers often have 403(b) plans.

If you've been working for a nonprofit, such as a school or hospital, you've probably been building up your nest egg in a 403(b). You might also have a 403(b) if you inherited the account from a loved one. Knowing the taxes and potential penalties that apply to a 403(b) withdrawal helps you determine the best time to take the distributions and set aside enough to cover your additional tax liability.

Income Taxes

Distributions from 403(b) plans are always taxable income because you received a tax deduction for your contributions. The distributions are taxed as ordinary income, which means the rate will depend on your income tax bracket. For example, if your income puts you in the 28 percent tax bracket, you're going to give Uncle Sam $280 out of every $1,000 you withdraw from your 403(b) plan. If, however, you're only in the 10 percent tax bracket, you only have to give Uncle Sam $100 for every $1,000 you distribute.

Early Withdrawal Penalties

If you aren't 59 1/2, you're withdrawal isn't a qualified withdrawal. This means your withdrawal is hit with an extra 10 percent tax, regardless of your income tax bracket. For example, if you take out $15,000, you're going to owe an extra $1,500 in your income taxes. Even if you have too little income to otherwise owe income taxes, you still have to file just to pay the penalty.

Penalty Exceptions

Uncle Sam cuts you some slack on the penalty if you meet one of the conditions for an exception to the penalty. Exceptions include if you're permanently disabled, are taking distributions as a beneficiary from an inherited 403(b) plan or if you use the money for medical expenses that are greater than 7.5 percent of your adjusted gross income. These exceptions only get you out of paying the penalty, not the regular income taxes, on the distribution.

Roth 403(b) Plans

If you have a Roth 403(b) plan, at least part of your distributions might be tax-free. If you take a qualified distribution, which is a distribution after you turn 59 1/2 and you've had the Roth 403(b) plan for five years, the entire amount is tax-free. For nonqualified distributions, because you didn't get to deduct your contributions when you deferred money into the Roth 403(b) plan, you won't have to include the portion of your distribution that is contributions. The earnings, though, are subject to the same taxes and penalties as regular 403(b) plan distributions.


About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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