A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some nonprofit employers (only US Tax Code 501(c)(3) organizations), and self employed ministers in the United States. The tax treatment is very similar to that of a 401k. Most people that I run into that have a 403(b) option are teachers, university employees, pastors, and hospital employees.
403b is the Tax Sheltered Annuity
When you are talking to someone who has a 403(b), they usually don’t know as that. They will usually refer to it their “tax sheltered annuity”. This is primarily when 403(b)’s were initially adopted, insurance companies were the first ones to get their foot in the door. So most people who had a 403(b), had an annuity that was tax sheltered. Do you see the connection yet? Good. More common now is that you will find mutual fund companies also available within 403(b) plans. Here soon, the 403(b) market is going to change as the regulators are stepping in to make them function more like 401k’s, but that’s for another day.
So if you have a 403(b), or maybe have access to one, but not using it; this is what you need to know:
What You Need to Know About 403b
Contributions to a 403(b) are taken from your paycheck. You cannot decide one day to wake up and put $5000 into it like you could your Roth IRA. Now I have had clients that will funnel in a majority of their paycheck near the end of the year trying to get in as much as they can. Obviously, you can’t put in more than you make for that pay period.
Three methods that you can contribute to a 403(b) plan:
- Elective Deferrals. Elective deferrals are contributions you make under a salary-reduction agreement. This agreement allows your employer to withhold money from your paycheck to be contributed to your 403b account. Elective deferrals are not taxed until withdrawn from the account.
- Non-Elective Contributions. Non-elective contributions are employer contributions and do not require a salary-reduction agreement. These can include matching contributions, discretionary contributions, and even mandatory contributions to the employee’s account as part of the overall contribution rules or policies established by the plan. As was the case with elective deferrals, non-elective contributions are not taxable until withdrawn.
- After-Tax Contributions. The final way that contributions can be made to a 403b account is via after-tax contributions. If your plan allows this type of contribution, these are salary payments taken from your paycheck on an after-tax basis. You cannot deduct this type of contribution from your federal income taxes, however upon withdrawal the taxed portion of the contribution will not be taxed again (but any appreciation, or growth, of this contribution over time will be taxed).
As far as how much you can put in, the limits are very similar to the 401k. The 403(b) does offer a little thing called MAC (Maximum Allowable Contributions). This includes your regular contributions, catch up contributions if over 50, and if you qualify for the 15 year rule. If you think you qualify for this, you should definitely inquire.
References: IRS Publication 571
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