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 fixed or discretionary. Eligible employees may elect to defer up to 100% of their salaries, as long as the amount does not exceed $17,000 (in 2012). 

A special “catch-up” contribution provision enables those who are 50 and older to save an additional $5,500. 

Further, the compensation limitation that can be taken into account when determining employer and employee contributions was $245,000 for 2011 and $250,000

Updated for 2012 contribution limits: 

The IRS has now released the official 2012 401k, 403b and other retirement plan contribution limits, which reflect a $500 increase over the 2011 standard contribution limit. 

This is a result of higher inflation and the latest cost of living adjustment (COLA) figures. The 2012 contribution limit is the first increase in three years. 

Each year in October these limits are adjusted according to a formula based on the inflation rate (linked to COLA) in the third quarter vs. the previous year’s quarter.

Employees have the option of choosing the types of investments 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 invest your funds. 

Your employer can provide you with a list of the investments that are available.

Distributions from 403(b) plans are taxed as ordinary income and, if made before the age of 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 that is calculated based on your life expectancy, or you can collect your entire investment 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 offered and how you can take advantage of this retirement funding vehicle, or speak with a professional for assistance.

If you are considering Retirement Planning, call for a free consultation today.