What Is a 403(b) Tax-Sheltered Annuity Plan?

A 403(b) tax-sheltered annuity plan (TSA) is a retirement sav♑ings plan for eꦺmployees of public schools, government agencies, and certain other tax-exempt non-profit organizations.

Employees who aܫre eligible to use a 403(b) inclu🐽de teachers, school administrators, professors, government employees, nurses, doctors, and librarians.

403(b) Contributions

The 403(b) Tax-Sheltered Annuity Plan operates like a 401(k) plan, allowing participants to save money for retirement through 澳洲幸运5官方开奖结果体彩网:payroll deductions while ﷺenjoying certain tax benefits. Similarities include:

• Contributions through payroll deductions
• Annual contribution limits set by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS)
• An option for the employer to match part of the employee's contribution
• Participants must reach 59½ before withdrawing funds or face an 澳洲幸运5官方开奖结果体彩网:early withdrawal penalty

Those who aไre eligible to contribute to a 403(b) include:

• Employees of public schools, state colleges, and universities
• Public school employees of Indian tribal governments
• Ministers, members of the clergy, and church employees
• Employees of other tax-exempt organizations

Types of 403(b) Tax-Sheltered Annuity Plans

Like the 401(k), the 403(b) plan can give the employee a choice of a traditional plan or a Roth plan. Not all employers offe🥀r a🤡 Roth option.

With a traditional 403(b) plan, the employee has pretax money automatically deducted from each paycheck and paid into a personal retirement account. Thus, the employee's income and the taxes owed on it are reduced for the year. The taxes will be due only when the employee makes a withdrawal.

With a Roth 403(b) plan, after-tax money is paid into the retirement account. There's no immediate tax advantage. But, the employee will not owe any more taxes on that money or the profit it accrues when it is withdrawn.

Advantages of 403(b) Plans

The big advantages of a 403(b) are the same as those for a 401(k): The money contributed and the earnings that accrue in a traditional account are tax-deferred until they are withdrawn. Both the contributions and the earnings in a Roth 403(b) are free from further taxes.

Many 403(b) plans vest funds over a shorter period than 401(k)s, and some even allow immediate vesting of funds, which is rare for 401(k)s.

An employee with 15 or more years of service with certain nonprofits or government agencies may be able to make additional catch-up contributions to a 403(b) plan. The usual eligibility for the catchup starts at age 50.

Disadvantages of 403(b) Plans

People who withdraw money from a 403(b) plan before age 59½ owe income taxes on the money in the year it is withdrawn, plus a 10% tax penalty. (The same rule applies to🐼 a 401(𝐆k) plan.)

The penalty can be avoided under certain circumstances, such as separating from an employer at age 55 or older, needing to pay a qualified medical expense, or becoming disabled. The taxes owed cannot be avoided.

When the 403(b) was invented in 1958, it was known as a tax-sheltered annuity. True to its history, the modern 403(b) offers the 澳洲幸运5官方开奖结果体彩网:variable annuity contract as an option.

Otherwise, a 403(b) tends to offer a more limited choice of mutual fund investments than its cousins in private business. plans. Many other investments, such as Individual stocks and 澳洲幸运5官方开奖结果体彩网:real estate investment trusts (REITs), are prohibited.

The Bottom Line

The 403(b) is offered by pub🅠lic schools and other tax-exempt organizations to many of their employees. It works just like a 401(k) plan offered by a company and may include contributions 🌼by employers. The IRS establishes limits to annual contributions to 403(b) plans, 401(k) plans, and IRAs.