The Most Comprehensive Financial Dictionary with over 1000 Financial Terms Explained - Clear and Concise Article Style Description with Practical Examples

What is a 403(b) Plan?


The term '403(b) Plan' is included in the Investments edition of the Financial Dictionary. Get yours now on mazon in ebook or paperback format. Read more here...

403(b) plans were created for employees of schools, churches, and tax exempt organizations. Individuals who are eligible may establish and maintain their own 403(b) accounts.  Their employers can and often do make contributions to the employees’ accounts. Individuals are able to open one of three different types of 403(b)s.

The first is an annuity plan that an insurance company establishes. These types of plans are sometimes called TDAs tax deferred annuities or TSAs tax sheltered annuities. A second plan type is an account which a retirement custodian offers and manages. With these 403(b)s, the account holders may only choose from mutual funds and regulated investment companies that the custodian allows. The final type is a retirement income account. These accounts accept a combination of mutual funds or annuities for the investment choices.

Employers have some control over these accounts. They are able to decide which financial institution will hold the employees’ 403(b) accounts. This determines the kind of plan that the employees are able to set up and fund. Employers receive several advantages from choosing to offer a 403(b).

The benefits which they get to offer their employees are worthwhile. This helps to ensure valuable employees stay with the organization. They also enjoy sharing the funding costs between themselves and their employees. Employers may also choose for the 403(b) to only accept employee contributions if they do not wish to participate financially in the account.

Employees also experience several benefits from these types of retirement vehicles. They may contribute tax deferred dollars from their income. They may also contribute taxed dollars to the accounts. In these Roth 403(b)s, all of their earnings accrue tax free for the entire life of the account. Deferred tax payments until retirement typically allow for the employees to pay fewer taxes as they are often in a more advantageous tax bracket at retirement point. Employees may also obtain loans from their 403(b) accounts as they need them.

A variety of non profit organizations may choose to establish such a 403(b) plan for their employees. This includes any 501(c)(3) tax exempt organization, co-op hospital service organizations, public school systems, ministers at churches, Native American public school systems, and (USUHS) Uniformed Services for the University of the Health Sciences.

Such 403(b) plans can obtain a variety of contribution types. Employees may have elective deferral contributions taken out of each paycheck. These are taken out in a pretax dollars arrangement. Employees also have the ability to contribute taxed dollars to the accounts. They have these deducted from their payrolls as well.

Employers may also choose to make contributions which are either discretionary or fixed amounts as they desire. Employees and employers may make contributions to Roth 403(b) accounts. These 403(b) accounts may also receive any combination of the previously mentioned contribution types, which demonstrates their flexibility.

Employees have generous annual contribution limits with these plans. In 2016, they may contribute up to $18,000 (or $24,000 if they are over 50 years old and catching up on contributions for retirement). For 2016, employers may also deposit as much as $53,000 (up to 100% of the employee compensation) as an annual contribution.

Regarding distributions, the rules are comparable to the other types of retirement savings vehicles. Distributions of deferred taxed dollars become taxable like regular income when the employee receives them. If these are taken before the employee turns 59 ½, then the withdrawn dollars are assessed the standard 10% penalty for early withdrawals. There are some exceptions to this penalty for which an employee may qualify. One of these exceptions is if the employee terminates the job even before reaching the age of retirement.

The term '403(b) Plan' is included in the Investments edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.