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Dear Liz,

I have a very small amount in my employer’s 403(b) retirement plan. I am 65 and still working. I withdrew $1,200 in March. What are the 403(b) withdrawal rules? What penalty or taxes would I have to pay on this amount or any other amount I may withdraw? Should I declare it on my 2015 income tax form next year? Do we always have to pay tax for withdrawing our retirement income?

— Ana

Dear Ana,

Not always, but usually.

You’re over 59 1/2, so you don’t have to pay federal or state penalties on retirement plan withdrawals. The federal penalty is 10%, and state penalties typically add a few percentage points to that toll.

You do, however, have to pay applicable income taxes. The plan will send you (and the IRS) a Form 1099-R, which is used to report distributions from pensions, retirement plans, annuities and insurance contracts.

What is a 403(b) plan?

Also known as a tax-sheltered annuity, a 403(b) plan is a 401(k)-type plan that is offered to employees by public schools, certain nonprofit organizations and some churches.

The tax you pay on the distribution depends on your tax bracket and whether you made any nondeductible (after-tax) contributions to the plan. If you made such contributions, those wouldn’t be taxed when they came out. For example, if you made $2,000 in after-tax contributions and your retirement account was worth $10,000, then only 80% of your withdrawal would be taxed.

Most likely, though, you made only deductible (pretax) contributions to your plan, so your entire distribution would be subject to income tax at your marginal tax rate. If you’re in the 25% federal bracket, you’ll owe Uncle Sam $300.

Withdrawals from most types of retirement plans incur income taxes. An exception is the Roth IRA. You can always withdraw an amount equal to your contributions without paying taxes. Once you reach age 59 1/2, the earnings can come out tax-free as well, as long as the Roth has been established for at least 5 tax years.

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