403(b) Plan: Introduction
What Is a 403(b) Plan?
A 403(b) plan is a retirement plan for certain public school employees, employees of tax-exempt organizations and ministers. Individual 403(b) accounts are established and maintained by eligible employees.
Accounts under a 403(b) plan can be one of the three following types:
- An annuity contract provided through an insurance company; these 403(b) annuity plans are also known as tax-sheltered annuities (TSAs) and tax-deferred annuities (TDAs).
- A custodial account provided through a retirement account custodian; investments are limited to regulated investment companies, such as mutual funds.
- A retirement income account, for which investments options are either annuities or mutual funds.
Why Establish a 403(b) Account?
The following are advantages of maintaining a 403(b) plan or account:
For the employer:
- Attractive benefits that help keep high-quality employees happy.
- A shared cost of funding between employers and employees (in some cases, only employees contribute to the 403(b) plan).
For the employee:
- Reduced taxable income through pretax contributions,
- Tax-deferred earnings on plan contributions. If the contributions are made to a Roth 403(b) account, earnings can be tax-free.
- The likelihood of paying less tax on assets as distributions usually occur during retirement, when an employee may be in a lower tax bracket.
- The ability to take loans from the 403(b) accounts.