Question

Since contributions to a 403(b) tax sheltered annuity are made with before-tax dollars, distributions are:

a) Tax-free
b) Tax-deferred
c) Tax-deductible
d) Taxable

Answer 1

While contributions grow tax-deferred within the 403(b) account, any money withdrawn from it is treated as taxable income. Option D is correct.

Step-by-step explanation:

Contributions to a 403(b) tax-sheltered annuity are made with pre-tax dollars, allowing for tax-deferred growth. However, when distributions are taken from the 403(b) account, they are considered taxable income. This means that the money withdrawn, including the earnings and contributions that have grown tax-deferred, is subject to income tax in the year it's withdrawn.

The principle behind a 403(b) is to postpone taxes until retirement when typically one's income tax rate is lower. But regardless of when or how much is withdrawn, the distributions are taxable. If funds are taken out before the age of 59½, there might also be an additional 10% early withdrawal penalty imposed by the IRS unless certain exceptions apply.

In summary, the correct answer is d) Taxable.