What is the tax treatment of distributions from a 403(b) annuity contract?

Distributions from a 403(b) annuity contract are taxed as ordinary income in the year they are received. This tax treatment is consistent because a 403(b) plan is a type of tax-deferred retirement savings account, primarily for employees of public schools and certain tax-exempt organizations. Contributions made to a 403(b) are typically made with pre-tax dollars, meaning they have not yet been taxed when contributed. As such, when distributions are taken from the account upon retirement or during other qualifying circumstances, the money is taxed at the individual's ordinary income tax rate.

The significance of this tax treatment is that it can affect retirement planning strategies, as individuals may face different tax obligations based on their total income in retirement. Understanding this aspect of a 403(b) annuity is crucial for effective financial planning, ensuring individuals adequately prepare for the potential tax implications of their distributions.