Is a 403(b) a Pretax or Post-Tax Deduction?

By: Grace Ferguson

If you work for a public school, state college, university or other tax-exempt organization, your employer may offer a 403(b) retirement plan -- also called a tax-sheltered annuity, or TSA for short. As a participant in the plan, you typically make contributions with pretax money. If the plan allows it, however, you may contribute with post-tax, or after-tax, money.

Salary Reduction Agreement

For your employer to withhold 403(b) contributions from your paychecks, you must give your consent via a salary reduction agreement. On the agreement, you indicate the amount you want withheld from your salary each pay period.

Pretax Contributions

A pretax 403(b) plan is similar to a traditional 401(k) plan in that they both allow you to make pretax contributions. You do not pay federal income tax, and, in most cases, state income tax on your contributions; however, Medicare tax and Social Security tax applies. Your pretax contributions are therefore excluded from your taxable wages on your W-2, but they are counted in your Social Security and Medicare taxable wages. Because you haven't paid income tax on this money, eventually -- typically during retirement when you receive payments -- you will pay income tax on it.

Post-tax Contributions

If the plan allows you to make post-tax contributions, such as via a Roth 403(b) plan, your employer takes federal and state income taxes and Social Security and Medicare taxes out of your contributions. Post-tax contributions are included in your federal, state and Social Security and Medicare taxable wages on your W-2. When you later receive payments from this type of plan, you do not owe any income taxes on your own contributions; however, you must pay taxes on your employer’s matching contributions, if any.

Contribution Limits

Under IRS rules, you can contribute up to a certain amount to your 403(b) plan yearly. As of 2013, you can generally contribute up to $17,500 in pretax or post-tax money. If you are 50 or over, you may contribute an additional $5,500 for the year. If the plan allows it, you might qualify for an annual limit of up to $20,000 if you have worked for a public school system, health and welfare service agency, church, hospital or home health service agency for at least 15 years.

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About the Author

Grace Ferguson has been writing professionally since 2009. With 10 years of experience in employee benefits and payroll administration, Ferguson has written extensively on topics relating to employment and finance. A research writer as well, she has been published in The Sage Encyclopedia and Mission Bell Media.

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