If you or someone in your family has taught at a public school, you probably know what a 403(b) plan is. For everyone else, read on for the 411 on the 403(b).
A 403(b) plan is a retirement plan for employees of public schools, certain tax-exempt organizations and certain ministries. Accounts in a 403(b) plan can be an annuity contract provided through an insurance company, a custodial account invested in mutual funds, or a retirement income account created for church employees. The 403(b) plan is a type of tax-sheltered annuity plan.
Like a 401(k), you don’t have to pay taxes on contributions to your account until after you start making withdrawals. This is not the case if you make contributions to a Roth program. Also, earnings on your contributions aren’t taxed until you start withdrawing them.
Who are 403(b)s for?
Eligible employees for 403(b) plans include:
- Employees of 501(c)(3) organizations
- Public school system employees involved with the day-to-day operation of a school
- Cooperative hospital service organizations
- Faculty and staff of the Uniformed Services University of the Health Sciences
- Employees of public schools organized by Indian tribal governments
- Ministers employed by 501(c)(3) organizations, self-employed ministers, and ministers/chaplains that act as ministers in their daily, professional lives, but aren’t employed by 501(c)(3)s
A 403(b) plan can only be set up by employers and, generally, contributions to the accounts can only be made by employers. However, you can make a salary reduction agreement with your employer, or elective deferrals, that allow you to withhold money from your paycheck to be contributed to your account pre-tax. Your employer can also make non-elective contributions, which include matching contributions, discretionary contributions and mandatory contributions. You can also make after-tax contributions that must be included on your tax return if your plan allows.
Contribution limits
There are limits on how much you can contribute to your 403(b) each year and if you exceed them, you may incur penalties. The most you can contribute is called your Maximum Amount Contributable (MAC). This includes your limit on annual additions and your limit on elective deferrals. Depending on the types of contributions you’ve made, your MAC may only be comprised of one of these limits. Check out the IRS website for more information on how to figure your MAC.
Just like the 401(k), withdrawals made before the age of 59½ are subject to a 10 percent tax penalty.
The 403(b): Serving public servants
For many of us, 403(b) plans will never pertain to our retirement plans. However, at the end of 2017, 403(b) plans held approximately $1 trillion in assets—a significant number that underscores the amount of Americans who work for the public.
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https://www.investopedia.com/terms/1/403bplan.asp
https://www.irs.gov/publications/p571#en_US_201801_publink1000239614
