Does a 403(b) Affect Social Security?

A 403(b) plan offers a structured way for employees of public schools, certain tax-exempt organizations, and ministers to save for retirement. This retirement savings vehicle allows individuals to contribute a portion of their salary, often on a pre-tax basis, into investment accounts. Social Security benefits, managed by the Social Security Administration (SSA), provide retirement, disability, and survivor income, funded through payroll taxes. This article explores how 403(b) contributions and distributions interact with Social Security, including specific provisions that previously impacted benefits for certain workers.

403(b) Contributions and Social Security Earnings

Contributions made to a 403(b) plan do not alter the amount of wages reported for Social Security tax purposes. Employers withhold Federal Insurance Contributions Act (FICA) taxes from an employee’s gross wages before any pre-tax 403(b) deferrals are deducted. This means an employee’s earnings record for Social Security remains based on their full, pre-deferral wages, up to the annual Social Security wage base limit.

The Social Security Administration calculates future benefits based on an individual’s average indexed monthly earnings (AIME), derived from their 35 highest-earning years. Since FICA taxes are applied to gross wages before 403(b) deductions, these contributions do not reduce the earnings recorded by the Social Security Administration. Therefore, contributing to a 403(b) does not directly diminish the earnings used to determine one’s primary insurance amount (PIA).

Some public employees, particularly those in certain state and local government positions, may not pay Social Security taxes on their earnings. Their employment is considered “non-covered” for Social Security purposes. This distinction arises from the type of employment and pension system, not from the presence or absence of a 403(b) plan. For most 403(b) participants covered by Social Security, their contributions do not affect their Social Security earnings record.

How 403(b) Distributions Affect Social Security Benefit Taxation

While 403(b) contributions do not impact the calculation of Social Security benefits, the taxation of distributions from a traditional 403(b) plan can influence whether those Social Security benefits become subject to federal income tax. Distributions from a traditional 403(b) are taxed as ordinary income, increasing an individual’s adjusted gross income (AGI) in retirement. This increase in AGI plays a role in determining “provisional income,” used by the Internal Revenue Service (IRS) to assess the taxability of Social Security benefits.

Provisional income is calculated by adding an individual’s AGI, any tax-exempt interest they receive, and 50% of their Social Security benefits. If this combined income exceeds certain thresholds, a portion of their Social Security benefits may be subject to federal income tax. For single filers in 2025, if provisional income is between $25,000 and $34,000, up to 50% of Social Security benefits may be taxable. If provisional income exceeds $34,000, up to 85% of benefits may be taxed.

For those filing jointly, the thresholds are $32,000 to $44,000 for up to 50% taxation, and above $44,000 for up to 85% taxation. Taking distributions from a traditional 403(b) can push an individual’s provisional income above these levels, causing a portion of their Social Security benefits to be taxed that might otherwise have been tax-free. This interaction highlights the importance of strategic retirement income planning.

Understanding the Windfall Elimination Provision and Government Pension Offset

Two provisions, the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), previously impacted Social Security benefits for individuals who also received a pension from employment not covered by Social Security. These provisions primarily affected public sector employees, such as teachers, firefighters, and police officers in many states, who did not pay Social Security taxes on their government earnings but often had other employment where they did contribute.

The WEP was designed to prevent a perceived “windfall” for workers who spent a portion of their career in non-covered employment and also qualified for Social Security benefits based on other covered work. It would reduce a worker’s own Social Security retirement or disability benefit. The GPO, on the other hand, reduced spousal or survivor Social Security benefits for individuals who received a pension from non-covered government employment, often reducing the Social Security benefit by two-thirds of the non-covered pension amount.

The Social Security Fairness Act, signed into law on January 5, 2025, repealed both the WEP and the GPO. This legislative change means that individuals who previously had their Social Security benefits reduced by these provisions will now receive their full, unreduced benefits. The repeal also authorized retroactive payments for those affected, with implementation and recalculation processes underway by the Social Security Administration.