403(b) Retirement Plan

What It Is:

A 403(b), commonly referred to as a Tax-Deferred Annuity (TDA) or Tax-Sheltered Annuity (TSA) plan, is a retirement savings plan available to employees of certain public education organizations, non-profit employers and cooperative hospital service organizations, as well as to self-employed ministers.  

How It Works/Example:

Organizations offer 403(b) tax-deferred retirement plans to eligible employees to allow for long-term investment growth, similar to a 401(k) plan. Contributions to these plans generally take one of three forms:

• The employer makes contributions to the plan through a salary-reduction agreement.

• The employee makes contributions to the plan.

• The employee makes contributions to the plan and the employer makes a matching contribution.

In 2010 the basic salary deferral limit is $16,250.

Why It Matters:

A 403(b) plan offers several unique benefits distinguishing it from a 401(k):

• 403(b) Age 50 + Catch-Up: Participants who are age 50 and over are eligible to make additional annual contributions to the 403(b) plan beginning in the year they turn 50. If a participant is already contributing the maximum amount to his/her 403(b) plan, then he/she may also be able to contribute even more using the Catch-Up Contribution. In 2004, the Age 50+ catch-up contribution limit was $3,000. That figure increases to $4,000 in 2005 and $5,000 in 2006.

• 403(b) Lifetime Catch-Up: This provision is available to employees who have completed at least 15 years of service, and allows participants to contribute up to $3,000 in addition to the regular contribution limit. To qualify for the Lifetime Catch-Up, the 403(b) plan participant must also have contributed an average of less than $5,000 a year to the plan. The maximum lifetime limit for this catch-up provision is $15,000.

• Taxes and Distributions: Taxes on 403(b) plan contributions and earnings are deferred until the plan owner takes a distribution from the plan. When money is withdrawn it is taxed as regular income. Withdrawals are typically made at or after the plan owner has reached the age of 59 1/2. If the plan owner withdraws money from the account prior to retirement age, then he/she will incur a 10% penalty payable to the IRS (unless specific circumstances apply).

• 403(b) Investment Options: Unlike 401(k) plans, 403(b) plan participants cannot invest in individual stocks. Investment options specific to 403(b) plans include annuity and variable annuity contracts with insurance companies,a custodial account that consists of mutual funds, as well as retirement income accounts for churches.