You still owe income tax on 403(b) withdrawals after age 60, but you may avoid the early withdrawal penalty
Yes, you pay federal income tax on money you withdraw from a 403(b) after age 60. The IRS taxes withdrawals as ordinary income at your current tax rate, the same as it would if you withdrew at 50. The difference is that once you turn 59½, you can withdraw without the 10 percent early withdrawal penalty — but the income tax itself does not go away.
The tax you owe depends on whether your 403(b) contributions were made with pre-tax dollars (the most common case) or after-tax dollars. If you contributed pre-tax, the entire withdrawal is taxable. If you made after-tax contributions, only the earnings on those contributions are taxed; your original contributions come out tax-free.
Your employer should send you a Form 1099-R in January showing how much you withdrew and how much is taxable. You report this on your federal tax return, and your state may tax it as well.
Key Takeaways
- Withdrawals from a 403(b) after age 60 are subject to federal income tax at your ordinary income tax rate, regardless of your age.
- You avoid the 10 percent early withdrawal penalty once you reach 59½, but this does not eliminate the income tax.
- If your contributions were pre-tax, the entire withdrawal is taxable; if you made after-tax contributions, only the earnings are taxed.
- Your employer reports the withdrawal on Form 1099-R, and you must include it on your federal and state tax returns.
- The amount of tax you owe depends on your total income for the year and your tax bracket.
How the 10 percent penalty works and when it stops
The 10 percent early withdrawal penalty applies to withdrawals made before age 59½. Once you turn 59½, you can withdraw from your 403(b) without triggering this penalty, even if you are still working. This is one of the few ways to access retirement savings early without a financial hit.
The penalty is separate from income tax. If you withdrew $10,000 at age 50, you would owe income tax on the full $10,000 plus a $1,000 penalty (10 percent). At age 60, you owe income tax on the full $10,000 but no penalty. The income tax itself remains.
Some employers offer in-service withdrawals, which let you withdraw while still employed. Check with your plan administrator to see if your 403(b) allows this. If it does, you can take money out at 60 without penalty, though you will still owe the income tax.
Pre-tax versus after-tax contributions and what gets taxed
Most 403(b) contributions are made with pre-tax dollars, meaning the money comes out of your paycheck before federal income tax is withheld. When you withdraw pre-tax contributions, the entire amount is taxable income in the year you withdraw it.
If you made after-tax contributions to your 403(b) — sometimes called Roth contributions or non-elective after-tax contributions — the rules are different. Your original after-tax contributions come out tax-free. Only the earnings (the growth on those contributions) are taxed when you withdraw.
Your plan statement should show how much of your balance is pre-tax and how much is after-tax. If you are unsure, ask your plan administrator. When you request a withdrawal, specify which portion you want to withdraw, and your administrator will calculate the taxable amount.
How much tax you actually owe on the withdrawal
The tax on your withdrawal depends on your total income for the year and your tax bracket. A $10,000 withdrawal is not automatically taxed at a fixed rate. Instead, it is added to all your other income — wages, Social Security, pensions, investment income — and taxed at the marginal rate for that total.
If you are in the 22 percent tax bracket and withdraw $10,000, you will owe roughly $2,200 in federal income tax on that withdrawal (though state tax may explore too). If you are in the 12 percent bracket, you will owe roughly $1,200. The exact amount depends on your specific situation and whether you have other deductions.
Your employer can withhold tax from the withdrawal automatically. When you request the withdrawal, you can choose how much to withhold — usually 10, 20, or 30 percent. If you do not request withholding, the employer will withhold 20 percent by default. Withholding is not the same as paying the tax; it is just money set aside. You may owe more or less when you file your return.
Form 1099-R and reporting the withdrawal on your tax return
Your 403(b) plan administrator will send you a Form 1099-R by January 31 of the year after you withdraw. This form shows the gross amount withdrawn, the taxable amount, and any tax withheld. You will receive a copy and the IRS will receive a copy.
You report the taxable amount from Box 2a of the Form 1099-R on your federal tax return. If you filed a 1040 form, this goes on line 4b (for distributions from IRAs, pensions, and annuities). If you used a tax software or hired a preparer, they will ask you about the 1099-R and enter it for you.
Keep the Form 1099-R with your tax records. If the form shows an incorrect amount, contact your plan administrator to request a corrected form (Form 1099-R with a "CORRECTED" stamp).
State income tax on 403(b) withdrawals
Most states tax 403(b) withdrawals as ordinary income, just as the federal government does. A few states — including Florida, Texas, South Dakota, Nevada, Washington, and Wyoming — do not have a state income tax at all, so you owe nothing to the state.
Some states offer partial exemptions for retirement income. Illinois, for example, does not tax retirement income from pensions and 403(b)s, but the rules vary by state and by the type of plan. If you live in a state with an income tax, your withdrawal will likely be subject to it unless your state has a specific exemption for 403(b) distributions.
Your employer may withhold state tax from your withdrawal, or you may need to pay it when you file your state return. Check your state's tax agency website or ask your plan administrator about the rules in your state.
Strategies to reduce the tax on your withdrawal
If you are withdrawing a large amount, consider spreading it over two or more years. A $50,000 withdrawal in one year may push you into a higher tax bracket, but two $25,000 withdrawals in consecutive years may be taxed at a lower rate. Your plan administrator can help you schedule withdrawals.
If you are still working and your plan allows it, you can take an in-service withdrawal without retiring. This lets you access the money while continuing to earn wages, which may keep your total income lower than it would be in retirement.
If you have significant medical expenses, charitable donations, or other deductions, these may offset some of the income from your withdrawal. Work with a tax preparer to see whether itemizing deductions makes sense for your situation.
Frequently Asked Questions
Do I have to withdraw from my 403(b) at age 60?
No. You can leave the money in your 403(b) as long as you are employed by the organization that sponsors the plan. Once you retire or leave the job, your plan may require you to withdraw or roll the money over. Required Minimum Distributions (RMDs) begin at age 73, at which point you must withdraw a certain amount each year.
What if I roll my 403(b) into an IRA instead of withdrawing?
A rollover to a traditional IRA does not trigger income tax or the early withdrawal penalty. You move the money directly from the 403(b) to the IRA, and no tax is due. You will owe tax only when you withdraw from the IRA later. This is often a good option if you want to avoid a large tax bill in a single year.
Can I withdraw only the earnings from my 403(b) and leave the contributions?
Not usually. Most 403(b) plans require you to withdraw a specific amount or percentage, not to cherry-pick which dollars come out. If you have both pre-tax and after-tax contributions, you can request to withdraw from the after-tax portion first, which minimizes the taxable amount. Ask your plan administrator what options are available.
Will my 403(b) withdrawal affect my Social Security benefits?
A 403(b) withdrawal does not directly reduce your Social Security benefits. However, if your total income (including the withdrawal) exceeds certain thresholds, a portion of your Social Security may become taxable. If you are claiming Social Security before age 67, the withdrawal also counts toward your earnings limit for the year.
What if I did not have taxes withheld from my withdrawal?
If no tax was withheld and you owe tax on the withdrawal, you will owe it when you file your return. You may also owe estimated tax payments for the following year if the withdrawal is large. A tax preparer can help you figure out what you owe and whether to make quarterly payments.