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 also another name for a tax-sheltered annuity (TSA) plan, and 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 of a 403(b) Retirement Plan
Earnings and returns on amounts in a 403(b) plan are tax-deferred until withdrawn.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, and 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 to a 403(b) Plan
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 of a 403(b) Plan
A 403(b) 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.
-
IRS Publication 571: Tax-Sheltered ...
A document published by the Internal Revenue Service (IRS) that ... -
Tax-Sheltered Annuity
A tax-sheltered annuity (TSA) allows an employee to make contributions ... -
Employee Contribution Plan
An employee contribution plan is an employer-sponsored savings ... -
Additional Voluntary Contribution ...
An extra allocation of funds to a retirement savings account ... -
Matching Contribution
A type of contribution an employer chooses to make to his or ... -
Withdrawal Benefits
The rights of an employee who has a qualified pension plan to ...
-
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. -
Financial Advisor
457 plans versus 403(b) plans: A comparison
There's plenty of advice about 401(k) plans, but what about 457 and 403(b) plans? Find out what these plans are about and the differences between them. -
Financial Advisor
Top 403(b) Questions Answered
This plan doesn't get as much attention as its more popular cousin - the 401(k) - but it has a lot of benefits for eligible investors. -
Retirement
Retirement Savings Tools I: Employer Savings Plans
There are a variety of employer savings plans that can offer multiple routes to saving for retirement. -
Retirement
401(k) Contribution Limits in 2017-18
Find out what the contribution limits are for 401(k) retirement savings plans in 2017-18, including individual, employer and aggregate limits. -
Managing Wealth
Deferred Compensation Plans for Nonprofits
Learn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
-
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 >> -
Can you have a 403(b) and also contribute to a 401(k)?
Yes. You may participate in both a 403(b) and a 401(k) plan. However, certain restrictions may apply to the amount you can ... Read Answer >>