Taxes on 401K or 403(b)?

[tax102523]

Can you please confirm that a person who has a 401K or 403(b) through their employer, and who has not received any distributions yet, does not have to pay taxes on either of these retirement accounts? Please confirm that the individual transactions that take place in the account (i.e., buying and selling within a fund) are not taxable events. Thank you!

[ClarissaA]

You are correct - there is no taxable event in a 401k or 403b until the funds are withdrawn.  When a distribution is taken, you will receive a 1099-R at tax time, and generally if you are withdrawing the funds, the plan administrator will give you an opportunity to direct how much tax you would like to be withheld when you take the money out. 

These retirement accounts are funded with pre-tax contributions (usually directly withheld via payroll deduction) and you will not pay any taxes on the activity in this type of account until you withdraw the money from the account (whether at retirement as it's intended, or early for some other reason.) 

Transactions within the account (buying and selling the underlying funds within the retirement account) are not taxable events.  Additionally, taking a loan out of your 401k does not generate a taxable event, unless you leave your employer before the loan has been fully repaid.  

[MelanieCPA]

Hi @tax102523 !  Thanks for joining us today.

You are correct.  You do not pay taxes on the money you contribute OR any gains, interest or dividends the 401(k) or 403(b) plan generates until you withdraw from the account. 

These plans are a great way to save for retirement and help reduce your current taxable income.  In 2023, you can contribute up to $22,500 a year to a 401(k) or a 403(b) plan.

Thank you!

Melanie, CPA