What Is a 403(b) Retirement Plan?

The 403(b) retirement plan is a tax-sheltered annuity. Its qualified plans are covered in the Employee Retirement Income Security Act of 1974. This act also protects the 403(b) assets from creditors. This is a long-term investment growth plan. Simply stated, once the employer has established the plan, the participating employee directs a portion of his annual salary into the fund.

History

The 403(b) plan was established in 1961 by the federal government. It was designed to encourage certain tax-exempt employees to create retirement programs. The name 403(b) stands for that particular IRS tax code section.

What Is It?

The 403(b) is a tax-deferred retirement plan that is available to all employees in education and certain nonprofit organizations. The determination is made according to section 501(c) of the IRS code.

Who Can Contribute?

Any employees of tax-exempt organizations created under the IRS code can contribute. Examples are professors, teachers, school administrators, librarians, ministers, doctors, nurses and researchers.

How It Works

Your pretax money is set aside through a salary reduction agreed upon between you and your employer. The money will grow tax free until it is withdrawn. It does not affect Social Security benefits.

Why Contribute?

The 403(b) plan creates a healthy retirement by providing a pension plan. It also lowers your taxes while you are still employed, since contributions come out of your salary before taxes are withheld. Once withdrawn, it is taxed only as ordinary income.