What is a 403(b) Plan?
A 403(b) plan is a retirement plan established for the benefit of employees of public schools and certain tax-exempt organizations. These plans accept payroll-deducted contributions for participant-directed investing and are intended to help the employees meet long-term objectives, such as generating retirement income.
Although these plans are also known as a tax-sheltered annuity (TSA) plans, your employer's 403(b) plan may not actually be a group annuity. Your Retirement Specialist can explain how your plan is structured, if that's of interest to you.
How do 403(b) plans work?
As a 403(b) plan participant, you contribute salary reductions – or "deferrals" – which are placed in a participant-directed account. Contributions are limited to an annual maximum dollar amount, as established under the Internal Revenue Code (IRC).
Once in your account, you decide where you want to invest your contributions from options selected by your employer, the plan sponsor. Investing involves market risk, including possible loss of principal. As you get started in the plan, we’ll help you understand market risk and strategies that may help you deal with it.
What are the advantages of participating in a 403(b) plan?
You may gain five benefits for contributing to a 403(b) plan.
- Your contributions and any earnings are tax-deferred
- Your money has the chance to potentially grow with the power of time and compounding
- You may be eligible to take a tax credit (Saver"s Credit) for contributions to your account
- You may be able to take withdrawals at age 59½, without penalty
- You may be able to take a hardship withdrawal, if your situation meets certain qualifications
You will pay ordinary income tax when and as you withdraw from your plan account.
Can I participate in both a 457(b) and a 403(b) plan?
In most cases, yes.
And you may be able to contribute up the maximum amount allowed by the IRC. There are certain conditions to meet, which can be explained by your Retirement Specialist, if your employer offers both types of plans.
Get the help you need
Talk with a Retirement Specialist if you have questions about 403(b) plans or plan participation. Information provided by Retirement Specialists is for educational purposes only and is not intended as tax or investment advice.
Source: "403(b) Plan Basics", Internal Revenue Service, www.irs.gov (accessed Jan. 10, 2012)