What is a 403(b) Plan?
A 403(b) Plan is a tax-advantaged retirement savings plan offered primarily to employees of public schools, certain non-profit organizations, and some ministers. Similar to a 401(k) plan, it allows employees to contribute pre-tax earnings into retirement savings, which can then grow tax-deferred until withdrawal. This setup helps individuals reduce their current taxable income while saving for retirement.
403(b) plans come in different forms, including annuity contracts provided through insurance companies, custodial accounts invested in mutual funds, and retirement income accounts set up for church employees. Participants often have the option to make traditional pre-tax contributions or Roth contributions, allowing for more flexibility in tax planning.
Employers may also contribute to an employee’s 403(b) plan, either through matching contributions or a set contribution amount. The plan has annual contribution limits, which are periodically adjusted by the IRS. Additionally, employees over 50 can make catch-up contributions, which enable them to save even more as they near retirement age.
Withdrawals from a 403(b) Plan are taxed as regular income, and early withdrawals before age 59½ are typically subject to a 10% penalty, with some exceptions. It’s important for participants to consider their long-term retirement goals when deciding how much to contribute to their 403(b) plan each year.
