A 401(k) Plan is one of the most commonly known retirement plan options on the market. But what about 403(b) Plans?
What is a 403(b) Plan?
A 403(b) plan is much like a 401(k) plan but is reserved exclusively for not-for-profit organizations, including public schools, employees of certain tax-exempt organizations, religious organizations, and certain ministers.
Investment options available in a 403(b) plan can be any of the following types:
- An annuity contract, which is a contract provided through an insurance company;
- A custodial account, offering mutual funds, exchange traded funds, stocks, and bonds
- A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.
403(b) plans offer benefits above and beyond those offered by a 401(k) plan. 403(b) plans do not require you to pay income tax on allowable contributions until you begin making withdrawals from the plan, which is usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income:
- Excluded: If an amount is excluded from your income, it is not included in your total wages on your Form W-2. This means that you do not report the excluded amount on your tax return.
- Deducted: If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you can subtract it when determining the amount of income on which you must pay tax.
However, if your contributions are made to a Roth contribution program, this benefit does not apply. Instead, you pay income tax on the contributions to the plan but distributions from the plan, including distributions of earnings (if certain requirements are met), are tax-free.
In addition, earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. Earnings and gains on amounts in a Roth contribution program are not taxed at all if your withdrawals are qualified distributions.
With 403(b) plans, you may be eligible to claim a tax credit for elective deferrals contributed to your 403(b) account. The IRS has more detailed information on the Retirement Savings Contributions Credit (Saver’s Credit).
- Employees of tax-exempt organizations established under section 501(c)(3). These organizations are usually referred to as Section 501(c)(3) Organizations or simply 501(c)(3) Organizations.
- Employees of public school systems involved in the day-to-day operations of a school.
- Employees of cooperative hospital service organizations.
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences.
- Employees of public school systems organized by Indian tribal governments.
Eligible ministers for 403(b) Plans include:
- Ministers employed by section 501(c)(3) organizations.
- Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.
- Ministers (chaplains) who meet both of the following requirements, meaning:
- They are employed by organizations that are not section 501(c)(3) organizations.
- They function as ministers in their day-to-day professional responsibilities with their employers