Connecticut Life Producer Practice exam

How are funds contributed to a 403(b) plan treated for tax purposes?

1. Subject to tax upon contribution

2. Taxable upon withdrawal

3. Tax-exempt on both contribution and withdrawal

4. Taxed immediately at the point of contribution

The correct answer is: Taxable upon withdrawal

Funds contributed to a 403(b) plan are generally not subject to income tax at the time of contribution. Instead, contributions are made on a pre-tax basis, meaning that taxes are deferred until the funds are withdrawn, typically during retirement. This tax-deferred status allows the funds to grow without being taxed as they accumulate over the years. When participants eventually withdraw funds from their 403(b) accounts, those withdrawals are then considered taxable income. This taxation applies to both the initial contributions (since they were made pre-tax) and the investment earnings that accumulated within the plan. This structure incentivizes saving for retirement, as it allows individuals to defer taxes until they may be in a lower tax bracket upon retirement. The other options imply immediate taxation or tax-exempt status on contributions or withdrawals, which does not align with how a 403(b) plan functions.