What Is a 403(b) Plan?

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When employees talk about retirement, there are often two different plans that come up: 401(k) and 403(b). Although you’ve probably heard of 401(k) plans, you might not be as familiar with 403(b) retirement plans. Let’s remove the confusion and intimidation surrounding 403(b)s right now.

What is a 403(b)?

Unlike 401(k) plans, which are for private-sector employees, a 403(b) is a retirement plan for certain employees of public schools, certain ministers, and employees of certain tax-exempt organizations. Charitable organizations, public universities and churches can all fall under this umbrella. These plans are also sometimes referred to as tax-sheltered annuities.

How does a 403(b) plan work?

Employees are allowed to defer a portion of their salary into the plan, but caps are in place to limit the amount of the contribution. Until it’s distributed, the deferred salary isn’t subject to federal or state income tax. The employer may also contribute to the plan. Employees can choose to invest in variable annuities, fixed annuities or mutual funds.

What are the penalties for withdrawing early?

If you withdraw funds from your 403(b) plan early, you could be subject to a variety of penalties. If you’re younger than 59 ½, you could be subject to a 10 percent penalty. You could also face income taxes on the total withdrawal or a 20 percent federal income tax withholding unless the entire amount is rolled over to another retirement plan.

Where can I go to find resources on 403(b) plans?

Visit the IRS official site to find additional resources specifically focused on 403(b) plans.


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