How does the taxation of a 403(b) distribution compare to an IRA distribution?

The correct answer indicates that both 403(b) and IRA distributions are subject to taxation as ordinary income, making them 100% taxable upon distribution. This taxation process reflects how both retirement accounts are designed to provide tax-deferred growth during the accumulation phase, but when funds are withdrawn, they are taxed at the individual's current income tax rate.

In the case of a 403(b), which is a retirement plan for certain employees of public schools and tax-exempt organizations, the contributions are generally made pre-tax. As a result, any distributions received after retirement are fully taxable as ordinary income. Similarly, traditional IRA distributions are also taxed as ordinary income when withdrawn. The intent behind both account types is to incentivize saving for retirement, but ultimately, tax obligations come due when distributions are taken.

Other options fail to accurately describe the taxation of these distributions: 403(b) distributions are not tax-free; thus, option A does not hold true. The idea that both distributions are taxed at capital gains rates, as suggested by option B, is also misleading because distributions from both 403(b) plans and traditional IRAs are taxed at ordinary income rates, not capital gains rates. Lastly, option D inaccurately implies that only 403(b) distributions incur