A 403(b) plan is an employer-sponsored retirement savings account that’s for employees of public schools, 501(c)(3) charities, and other tax-exempt organizations. It’s very similar to a 401(k), which is the better-known type of retirement account available to employees of for-profit companies.
Sometimes 403(b) plans are called tax sheltered annuities (TSA’s) or tax deferred annuities (TDA’s).
As an employee, a 403(b) plan offers you several advantages for saving for retirement. When you make contributions to your 403(b) account, they’re not taxed. You don’t pay tax on your money until you withdraw it. So if you wait until you’re retired to take distributions from your account, you’ll likely be in a lower tax bracket than you were when you were working, and you’ll save on taxes.
Like a 401(k), your employer can make contributions to your account, and you can take loans against the amount you have saved in your 403(b).
When can you start withdrawing money from your account? There are certain “triggering events” that allow you to take distributions from your account without penalty. Under normal circumstances, you can start taking distributions when you reach age 59 ½. There are other limited circumstances under which you can take withdrawals before this point, like:
- If you become disabled;
- If you leave your job; or
- At your death, in which case your beneficiaries become eligible to take distributions from your account.
Sometimes, you can also take early distributions from your account if you experience financial hardships.
If you withdraw money from your account without a “triggering event” happening, then you’ll have to pay a 10% penalty to the IRS, in addition to your distributions being taxed as normal income.
You have to start taking distributions at age 70 ½, and there’s a required minimum distribution amount each year. This amount is calculated based on the amount of money in your account and your life expectancy.
If your employer offers a 403(b), consider signing up – it can be a valuable cornerstone for your retirement savings plan.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.