What Is a 403(b) Plan?

A 403(b) plan is a special tax-deferred retirement savings plan that is often referred to as a tax-sheltered annuity, a tax-deferred annuity, or a 403(b) annuity. It is similar to a 401(k), but only the employees of public school systems and 501(c)(3) organizations are eligible to participate in 403(b) plans.

Employees can fund their accounts with pre-tax contributions, and employers can also make contributions to employee accounts. Employer contributions can be the same amount each month or discretionary. Eligible employees may elect to defer up to 100% of their salaries, as long as the amount does not exceed $18,500 (in 2018, up from $18,000 in 2017). A special “catch-up” contribution provision enables those who are 50 and older to save an additional $6,000. Total combined employer and employee contributions cannot exceed $55,000 in 2018 (up from $54,000 in 2017).

Staying in control of your 403(b) plan

Employees have the option of choosing the types of products utilized in their funds. A 403(b) can be an annuity contract, a custodial account, or a retirement income account. It is a good idea to do a little research before selecting how you would like to use your funds. Your employer can provide you with a list of the financial instruments that are available.
Distributions from 403(b) plans are taxed as ordinary income. Withdrawals made before age 59½ may be subject to a 10% federal income tax penalty unless a qualifying event occurs, such as death or disability.

Generally, once you reach age 70½, you must begin taking annual required minimum distributions. You can receive regular periodic distributions on a schedule, or you can collect your entire nest egg as a lump sum.

Participating in a 403(b) plan may be a good way to save for retirement. Contact your employer to find out what type of plan is available and how you can take advantage of this retirement funding vehicle. And, if you’re planning to retire soon, here are some tips you should be thinking about.

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