What is a 403b retirement plan?
A 403b plan is a tax sheltered annuity(TSA) plan which is a retirement plan for employees of public educational organizations, employees of tax-exempted organizations (such as IRS) and a selected few ministers. It is a tax treatment plan which is similar to the 401k plan.
Employee salary deferrals under the 403b plan are made before income tax is paid and is allowed to go tax-deferred until the money is taxed as income when withdrawn from the plan.
Types of individual account holders under the 403b plan:
- An annuity contract which is a contract provided through an insurance company.
- A custodial account which is an account invested in mutual funds
- A retirement income account setup for retired employees of a church. They can invest in both annuities and mutual funds.
The employer may determine which financial institution theor employees are maintaining their 403b accounts, which in turn helps to track the type of account the employees eligible under the 403b plan have established- be it annuity or fund.
Who can set up a 403b account?
You cannot setup a 403b account, only your employer can. For ministers as well, only the organization you are associated with can setup the account for you.
Why establish a 403b plan?
Benefits for the employer:
- Availability of attractive benefits which keep the premium employees happy.
- Shared cost funding between employees and employers.
Benefits of employees:
- Reduced taxable income
- Tax-deferred earnings on plan contributions. Contributions made to a Roth 403b account can be earned tax-free.
- More likely to pay lesser price for assets after retirement as employees are in a lower tax bracket.
- Can withdraw loan from 403b accounts.
How are contributions made to the 403b account?
- Elective deferrals: These contributions are made under a salary reduction agreement. Employers can withhold money from your salary and contribute them directly towards your 403b account.
- Non Elective contributions: Employer contributions not made under a salary reduction agreement. These may include matching contributions, discretionary contributions and mandatory contributions made. You need not pay any income tax for these until you withdraw these contributions.
- After tax contributions: These contributions must be included when you are filing for income tax on your tax returns. A salary payment on which income tax is withheld can be a source of these contribution.
- Any combination of the above three.
Amount Excluded: If an amount is excluded from your income and is not included in the total wages of W-2 form you do not report the excluded amount on your tax return.
Amount Deducted: If an amount is deducted from your income and is included in the other wages on your W-2 form you will report this amount on your tax returns but you are allowed to subtract it when figuring the income amount on which you should pay tax.