What is a 403b plan?

by Chris Butterworth on June 15, 2011

A 403(b) plan is one type of tax-favored retirement savings plan available to individuals interested in saving for retirement in the United States.  This type of play is a “defined contribution” plan rather than a “defined benefit” plan which means that the plan prescribes how much you can contribute, but doesn’t determine how much you will receive at retirement.  A 403(b) plan is a special class of retirement plan that is similar to a 401(k) in many ways, but is specifically designed for eligible employees of public schools, tax-exempt organizations such as 501c(3)’s, and some people who work for tax-exempt religious organizations.

Who can set up a 403(b) plan?

Like many retirement plans, the 403(b) can only be established by an employer.  A 403(b) is governed by certain plan documents which much comply with IRS standards, but offers some leeway on certain aspects of the plan, for instance whether or not rollovers are accepted or loans may be made.

Who is eligible to participate?

Eligibility depends on how a tax-exempt organization is created; they must  follow organizational rules and regulations described in Internal Revenue Code Section 501(c)(3).  Eligible employees include public schools workers involved in daily operations those who work in schools organized by Indian tribal governments, workers in hospital service and other medical organizations, and some ministers or other workers associated with religious organizations.

Will I pay taxes on my 403(b) contributions?

Yes and no.  Similar to a 401k, normal contributions to a 403(b) plan are not taxed for the purpose of federal income tax, however they are subject to Social Security and Medicare taxes.

Why would you participate in a 403(b) plan?

A 403(b) plan is similar to other tax-favored savings plans; income tax is deferred until a time of distribution when theoretically, a person’s marginal tax rate is lower than during their “working” years.  Most contributions can be either excluded or deducted from personal income up to certain contribution limits.

What are the contribution limits for 403(b) plans?

The contribution limits for 403(b) plans are more complex than those of 401k’s so they bear investigating a bit more by reading the IRS publication 571.  You can, as an employee, make contributions through voluntary  deferrals from your paycheck.  The 2012 contribution limit for elective deferrals is $17,000; In addition, individuals that are 50 or over are eligible to contribute an additional $5,500 to their 403b.  Total annual 403b contributions (both deferrals and other contributions such as employer-matching funds) in 2012 cannot exceed $50,000.  This number doesn’t include the catch-up contribution, so the limit would be $55,500 including these figures.   Also, 403(b) plans have special rules where additional contributions can be made beyond these limits, including the “15 year rule.”

What is a Roth 403b?

Similar to a Roth 401k some 403b plans allow after-tax contributions.



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