A 403(b) plan is a supplemental retirement plan for certain employees of public schools, tax-exempt organizations and ministers. Individual 403(b) accounts are established and maintained by eligible employees. The employer may determine the financial institution(s) at which individual employees may maintain their 403(b) accounts. Among the benefits available to those who participate in this plan is the opportunities to:
- reduced taxable income through pre-tax contributions.
- tax-deferred earnings on plan contributions.
- likelihood of paying less tax on assets as distributions usually occur during retirement, when an employee may be in a lower tax bracket.
You will have a variety of companies to choose from along with the extensive investment options available under their 403(b) supplemental retirement accounts. The amounts you specify are deducted from each paycheck you receive excluding longevity pay.
The combined total contributions to a 403(b) and/or a 401(k) plan(s) cannot exceed the Internal Revenue Service limit set for individual plans–that is, $18,000 (or $24,000 for employees age 50 or over) per year. There is a 10% penalty for withdrawal before the age of 59 1/2 (although the withdrawal is subject to ordinary income taxation).
The primary purpose of the deferred income plan is to allow you to postpone receipt of a portion of your current income until after you retire. The amount of current earnings deferred will not be considered as income for federal income tax purposes until you actually receive the income, usually after retirement when you may be in a lower tax bracket. At that time, it will be taxed as ordinary income. By deferring payment of income taxes until you receive the value of your account as a retirement benefit, you can invest more of your current earnings for retirement. By doing so, you may reduce the total amount of income taxes paid during your lifetime and thereby accumulate a larger sum for retirement than would have been possible had you invested after-tax dollars.