Do You Report a 403(b) on Taxes? What You Need to Know

Understanding how to report a 403(b) on taxes is crucial for anyone participating in this retirement savings plan. As tax season nears, grasping the nuances of contributions and their implications can help you file accurately and maximize tax benefits.

This article explores key aspects such as employer contributions, reporting requirements, and handling distributions associated with a 403(b).

Pre-Tax vs Roth 403(b)

Understanding the distinction between pre-tax and Roth contributions is essential for effective tax planning. Pre-tax 403(b) contributions are deducted from your salary before taxes, reducing your taxable income for the year. For example, if you earn $60,000 annually and contribute $5,000 to a pre-tax 403(b), your taxable income decreases to $55,000. This can be especially beneficial for those in higher tax brackets, offering immediate tax savings.

Roth 403(b) contributions, on the other hand, are made with after-tax dollars and do not lower your current taxable income. Their advantage lies in tax-free growth and withdrawals if specific conditions are met. For instance, a $5,000 Roth 403(b) contribution could grow to $20,000, and the entire amount can be withdrawn tax-free in retirement if you are at least 59½ years old and have held the account for at least five years.

Choosing between pre-tax and Roth contributions often depends on your current tax rate versus your expected retirement tax rate. If you anticipate being in a higher tax bracket during retirement, Roth contributions might be more advantageous. Conversely, pre-tax contributions may be more beneficial if you expect a lower tax rate in retirement.

Employer Contributions

Employer contributions can significantly boost retirement savings. They are typically made as matching or non-elective contributions. Matching contributions occur when employers match a portion of the employee’s contributions, often up to a percentage of their salary. For example, an employer might match 50% of contributions up to 5% of an employee’s salary.

Non-elective contributions are made regardless of whether the employee contributes to the plan. These can be particularly helpful for employees unable to contribute a large portion of their salary. The Internal Revenue Code (IRC) limits total annual contributions to a 403(b), including both employee and employer contributions. In 2024, this limit is $66,000 or 100% of the employee’s includable compensation, whichever is less.

Employer contributions are not included in the employee’s taxable income when made but grow tax-deferred until withdrawn. Employees should also understand their plan’s vesting schedule, which determines when employer contributions become fully theirs. For example, an employer might require five years of service before contributions are fully vested.

Where Contributions Are Reported

403(b) contributions are reported on your W-2 form, specifically in Box 12. Pre-tax contributions are marked with code “E,” while Roth contributions use code “BB.” It’s important to verify these amounts against your records to ensure accurate tax filing.

Although Roth contributions don’t affect your current taxable income, keeping track of them is vital for long-term planning, especially for tax-free withdrawals in retirement. The total amount of your contributions should also appear on Form 1040, influencing your overall taxable income and tax calculations.

Handling Distributions

Distributions from a 403(b) plan are generally taxed as ordinary income. Withdrawals before age 59½ may also incur a 10% early withdrawal penalty unless exceptions apply, such as separation from service at age 55 or older, certain medical expenses, or disability.

Timing distributions strategically can help manage tax liability. For example, taking a large lump-sum distribution might push you into a higher tax bracket, while spreading withdrawals over multiple years could help keep you in a lower bracket. Required Minimum Distributions (RMDs) must begin at age 73, as mandated by the SECURE Act 2.0. Failing to take RMDs can result in penalties, though recent legislation has reduced these penalties to 25% or 10% if corrected promptly.

Additional Taxes

Certain distributions may trigger additional tax liabilities. Early withdrawals are subject to a 10% penalty unless exceptions apply. For high-income earners, distributions can also impact Modified Adjusted Gross Income (MAGI), potentially triggering the 3.8% Net Investment Income Tax (NIIT). While 403(b) distributions themselves aren’t classified as investment income, they can raise MAGI, indirectly leading to NIIT on other income sources like dividends or capital gains. Planning distribution timing can help avoid crossing income thresholds and mitigate this risk.

State income tax treatment of 403(b) distributions varies. States like Florida and Texas do not tax retirement distributions, while others, such as California, fully tax them as ordinary income. Some states offer partial exclusions or deductions for retirement income, so understanding your state’s rules is essential for accurate tax planning.

Record Retention

Thorough record-keeping is critical for tax compliance and financial planning. Keep W-2 forms, pay stubs, and account statements to document contributions and how they were categorized—pre-tax or Roth. For Roth accounts, retaining records of after-tax contributions is crucial to proving eligibility for tax-free withdrawals.

For distributions, maintain Form 1099-R, which reports the total distribution amount, taxable portion, and any withholding for federal or state taxes. If you qualify for penalty exceptions, retain supporting documentation, such as medical expense receipts or proof of disability. While the IRS generally recommends keeping tax records for three years, it’s wise to keep retirement account records indefinitely to address potential questions about contributions or withdrawals in the future.