A
403(b) plan is a type of tax sheltered retirement plan
which has a lot in common with the more widely recognized 401(k) plans.
A 403(b) plan is for employees who work in organizations that serve
certain religious, charitable, scientific, public safety testing,
literary or educational purposes.
If you are eligible to participate in a 403(b) plan, you should
evaluate your options.
You
cannot claim a tax deduction for your 403b plan contributions on your
income taxes
like you would with contributions made to a traditional IRA because the
deduction is already figured by your company.
This adjustment will be apparent on your W-2 form that you receive at
the end of the year showing your income for the year.
There are three benefits to contributing to a 403(b)
plan.
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The first benefit is that you do not pay income tax
on allowable contributions until you begin making withdrawals from the
plan, usually after you retire. Allowable contributions to a 403(b)
plan are either excluded or deducted from your income. However, if your
contributions are made to a Roth contribution program, this benefit
does not apply. Instead, you pay income tax on the contributions to the
plan but distributions from the plan (if certain requirements are met)
are tax free.
Note.
Generally, employees must pay social security and Medicare tax on their
contributions to a 403(b) plan, including those made under a salary
reduction agreement.
-
The second benefit is that earnings and gains on
amounts in your 403(b) account are not taxed until you withdraw them.
Earnings and gains on amounts in a Roth contribution program are not
taxed if your withdrawals are qualified distributions. Otherwise, they
are taxed when you withdraw them.
-
The third benefit is that you may be eligible to
take a credit for elective deferrals contributed to your 403(b) account.
Individual accounts in a 403(b) plan can be any of the
following types.
-
An annuity contract, which is a contract provided
through an insurance company,
-
A custodial account, which is an account invested in
mutual funds, or
-
A retirement income account set up for church
employees. Generally, retirement income accounts can invest in either
annuities or mutual funds.
If an amount is deducted from your income, it is included with your
other wages on your Form W-2.
You report this amount on your tax return, but you are allowed to
subtract it when figuring the amount of income on which you must pay
tax.
