About 403(b) Plans
If you work for a public school or a 501(c)(3) tax-exempt organization, a 403(b) is a great way to save for retirement.
The 403(b) plan is an employer-sponsored supplemental retirement savings plan that, similar to a 401(k) plan, allows employees to contribute on a pre-tax or (if permitted by the 403(b) plan) Roth after-tax basis. A 403(b) plan can only be sponsored by a public school or a 501(c)(3) tax-exempt organization.
If your employer sponsors a 403(b) plan, you’ll get valuable benefits for retirement savings.
- Tax-deferred investment earnings. The earnings in your investment are compounded (re-invested) and have the potential to grow tax-deferred. These tax-deferred earnings may grow faster than a similar taxed account because taxes are not due until withdrawn.
- Ability to reduce your taxable income. You determine the amount of your 403(b) contributions (up to IRS-defined limits) through a salary reduction agreement with your employer. Your contributions will be pre-tax, reducing your current taxable compensation.
- Catch-up contributions. If you are a longer service employee or are at least age 50, you may be able to contribute beyond the general IRS limits.
- Ability to have earnings withdrawn tax-free. Your 403(b) plan may permit you to make Roth contributions, which are made on an after-tax basis. The earnings on Roth 403(b) accounts may be free from federal income tax if you meet certain IRS criteria when you are eligible for a distribution under the 403(b) plan.
- Employer contributions. Depending on the 403(b) plan design, your employer may also make a contribution to the 403(b) plan.
- Investment options that you can control. Typically, a 403(b) plan lets you choose among investment funds, often ranging from very conservative to aggressive growth, offered under the Plan.
- Employees can access their accounts when they have a distributable event under the Plan. Amounts typically are subject to income tax when withdrawn from the Plan and you may also be subject to the IRS 10% premature distribution penalty tax unless you meet one of the IRS exemptions. Special rules apply to withdrawals of Roth 403(b) amounts.
- Portability. If you leave your job, you can leave your money in plan, roll your 403(b) account to into another employer’s eligible retirement plan, or to a traditional IRA or (if rolled directly) a Roth IRA. You also have the option of cashing out.1 The distribution will be subject to income tax and the 10% premature distribution penalty tax unless you meet one of the IRS exemptions.
For 403(b)(1) fixed or variable annuities, employee deferrals (including earnings) may generally be distributed only upon your: attainment of age 59½, severance from employment, death, disability, or hardship. Note: Hardship withdrawals are limited to employee deferrals made after 12/31/88. Exceptions to the distribution rules: No Internal Revenue Code withdrawal restrictions apply to ’88 cash value (employee deferrals (including earnings) as of 12/31/88) and employer contributions (including earnings). However, employer contributions made to an annuity contract issued after December 31, 2008 may not be paid or made available before a distributable event occurs. Such amounts may be distributed to a participant or if applicable, the beneficiary: upon the participant's severance from employment or upon the occurrence of an event, such as after a fixed number of years, the attainment of a stated age, or disability. For 403(b)(7) custodial accounts, Employee deferrals and employer contributions (including earnings) may only be distributed upon your: attainment of age 59½, severance from employment, death, disability, or hardship. Note: hardship withdrawals are limited to: employee deferrals and ’88 cash value (earnings on employee deferrals and employer contributions (including earnings) as of 12/31/88).
This material is provided for general and educational purposes only; it is not intended to provide legal, tax or investment advice. All investments are subject to risk. We recommend that you consult an independent legal or financial advisor for specific advice about your individual situation. The tax information herein is not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding tax penalties. Taxpayers should seek advice based on their own particular circumstances from an independent tax advisor.
1 Carefully consider the provisions of your current retirement plan and the new product for differences in cost, benefits, surrender charges or other important features before transferring assets. You should consult your own legal and tax advisors regarding your situation.