Loading the player...

What is a '403(b) Plan'

A 403(b) plan is a retirement plan for specific employees of public schools, tax-exempt organizations and certain ministers. These plans can invest in either annuities or mutual funds. A 403(b) plan is another name for a tax-sheltered annuity (TSA) plan. The features of a 403(b) plan are comparable to those found in a 401(k) plan.

BREAKING DOWN '403(b) Plan'

Employees may make salary deferral contributions. However, they are bound by regulatory limits. Individual accounts in a 403(b) plan include an annuity contract, bought through an insurance company or a custodial account, which invests in mutual funds or a retirement income account established for church workers.

Employees of tax-exempt organizations are eligible to participate in the plan. Participants include teachers, school administrators, professors, government employees, nurses, doctors and librarians. A TSA is another funding source for retirement in addition to a retirement plan or pension that helps employees meet their retirement goals. Many plans vest funds over a shorter period than 401(k) plans or may allow immediate vesting of funds.

Benefits

Earnings and returns on amounts in a 403(b) plan are tax-deferred until withdrawn. Earnings and returns on amounts in a Roth 403(b) are tax-deferred if the withdrawals are qualified distributions. Employees age 50 or over can make catch-up contributions to both plan types. Employees may be eligible for matching contributions, which varies by employer.

For example, an employer matches funds at 50% of any contributions an employee gives, up to 6% of an employee's salary. If an employee earns $75,000 and contributes 6%, or $4,500, the employer contributes $2,250, which is essentially free money towards the employee's retirement. This helps employees exceed the annual maximum contribution limits, receive tax deductions and accelerate their retirement goals.

How to Contribute

Different types of contributions fund TSAs, such as after-tax contributions, nonelective contributions and elective deferrals. After-tax contributions are voluntary contributions up to 25% of a participant's salary that a participant must include in income when filing taxes. Nonelective contributions are mandatory employer contributions, such as discretionary contributions that include end-of-plan-year contributions or profit-sharing contributions.

Elective deferrals are voluntary contributions set up by the employee that allows an employer to withhold money from the employee's paycheck to be paid directly into his TSA. These contributions are a percentage of the employee's salary. Another funding option is using a combination of elective, nonelective and after-tax contributions.

Disadvantages

A TSA plan withdrawal before age 59 1/2 is subject to a 10% tax penalty. A participant may avoid the 10% penalty under certain circumstances, such as separating from an employer when a person reaches age 55, a qualified medical expense, death of the employee or disability. Withdrawals assess a 20% federal income tax withholding unless the total amount is transferred to another qualified retirement plan or individual retirement account. However, if a participant wants to dissolve an annuity investment, the participant must pay a surrender charge of up to 8% of the investment.

RELATED TERMS
  1. Employee Contribution Plan

    A company-sponsored retirement plan where employees may elect ...
  2. Savings Incentive Match Plan For ...

    A retirement plan that may be established by employers, including ...
  3. Nonelective Contribution

    A type of contribution an employer chooses to make to each of ...
  4. Matching Contribution

    A type of contribution an employer chooses to make to his or ...
  5. Additional Voluntary Contribution ...

    An extra allocation of funds to a retirement savings account ...
  6. Designated Roth Account

    An individual retirement plan in which employees can have all ...
Related Articles
  1. Retirement

    Explaining the 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers.
  2. Financial Advisor

    403(b) Plan Tutorial

    Learn about the set-up, the contributions to and the distributions from this retirement plan for certain employees of public schools and tax-exempt organizations.
  3. Financial Advisor

    The 4-1-1 on 403(b) Plans

    These plans resemble 401(k) plans in many respects, but are specially designed for nonprofit entities.
  4. Retirement

    Got a 403(b) Plan? Here's What You Need to Know

    Many folks do not understand the ins and outs of their 403(b) plan. Let's change that.
  5. Small Business

    Plans The Small-Business Owner Can Establish

    Don't hesitate to adopt a smart plan for you and your employees.
  6. Retirement

    Why are 401(k) contributions limited?

    Find out why contributions to 401(k) retirement plans are limited, including what the current contribution limits are and how limits encourage participation.
  7. Financial Advisor

    What's a Qualified Retirement Plan?

    Employers establish qualified retirement plans to help their employees save money.
RELATED FAQS
  1. What are qualified retirement plan types?

    Understand the different types of qualified retirement plans and what they mean in terms of employee and employer contribution ... Read Answer >>
  2. What are the 403(b) contribution limits?

    Determine whether 403(b) contributions meet federal guidelines. Contribution limits to this retirement plan are determined ... Read Answer >>
  3. Who is eligible to obtain a 403(b) plan?

    Learn which employers offer 403(b) plans and see how they are custom-designed for nonprofits but similar to 401(k) plans ... Read Answer >>
  4. How do I report Simple IRA contributions on a W2?

    Learn how Savings Incentive Match for Employees, or SIMPLE IRA, contributions are reported for the participant on Form W2 ... Read Answer >>
Hot Definitions
  1. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, long, short and derivative positions with the goal ...
  2. Financial Statements

    Records that outline the financial activities of a business, an individual or any other entity. Financial statements are ...
  3. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  4. Money Market

    A segment of the financial market in which financial instruments with high liquidity and very short maturities are traded. ...
  5. Block (Bitcoin Block)

    Blocks are files where data pertaining to the Bitcoin network is permanently recorded.
  6. Fintech

    Fintech is a portmanteau of financial technology that describes an emerging financial services sector in the 21st century.
Trading Center