Why Is There a 20 Percent Federal Withholding on My 403(b)?

Rollovers from a 403(b) account must be reported on your tax return.

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A 403(b) plan or tax-sheltered annuity is a retirement plan designed for public school employees and individuals who work for certain tax-exempt organizations. It functions as a defined contribution plan, which means you build your nest egg through elective deferrals. If you leave your job, you can roll 403(b) funds into another eligible retirement plan but you may be subject to federal income tax withholding.

Withholding Requirements

Generally, 403(b) accounts and similar defined contribution plans are funded using pre-tax dollars, which means you don't pay taxes on the money until you start making withdrawals. To ensure that you pay your fair share of taxes, the IRS imposes the 20 percent withholding requirement any time you roll funds over from one retirement account to another. The 20 percent withholding applies only to the taxable portion of eligible rollover distributions. The withholding does not apply to required minimum distributions, loans treated as distributions, hardship distributions, distributions of excess contributions and related earnings, dividends on employer securities, the cost of life insurance coverage or distributions that are part of a series of substantially equal payments.

Rollover Methods

There are two ways you can roll over your 403(b) account. The first option is a direct rollover, which means the plan administrator transfers the money to another eligible retirement account for you. If you choose the trustee-to-trustee transfer, the mandatory withholding is waived. The other option is an indirect rollover. In this scenario, the plan administrator issues you a check and you then have 60 days to roll the money over. The 20 percent withholding would apply unless you specifically ask for the check to be made out to the receiving plan.

Tax Reporting

If you roll over 403(b) funds, your employer will send you a 1099-R at the beginning of the following tax year. You'll need to use the information on this form to complete your tax return. If you completed a direct rollover, you can report the federal withholding amount as zero. If you did an indirect rollover, you'll need to report the amount from box 4 of the 1099-R on line 62 of your 1040. You may be eligible for a refund if too much was withheld. If you didn't roll the money over, you'll have to pay taxes on the entire distribution, which means you may owe the IRS if the 20 percent withholding doesn't cover your tax liability.


If you do an indirect rollover of 403(b) funds, you'll have to make up the amount that was withheld when you put the money into another retirement account. If you don't make up the difference, it's considered a distribution by the IRS which means it's taxable at your regular income tax rate. In addition to paying taxes on the money, you would also have to kick in an additional 10 percent early withdrawal penalty if you're under age 59 1/2. The IRS does allow exceptions to this rule in certain situations. For example, you may avoid the early withdrawal penalty if you took a distribution from your 403(b) because of a total and permanent disability.