403(b)

What is a 403(b) plan?

A 403(b) plan of the USA is yet another tax-advantaged retirement savings plan. The only difference between a 403(b) and 401(a) & (k) is that a 403(b) is for NPOs and some specific government bureaus like public education organizations, self-employed ministers, cooperative hospital organizations in the United States, etc.

The amount to be contributed can be set by the employees and unlike 401(a) plans, employers don’t necessarily have to contribute in 403(b).

Usually 403(b) plans are invested in multiple returns such as custodian accounts, mutual funds, or even retirement incomes for church employees, etc.

Where 401(k) plans allow flexibility in investments on the flip side 403(b) only offers annuities and mutual funds. It’s still advantageous as there are multiple mutual funds to choose from. For a good retirement income, annuities are also a good option if you choose the correct one.

The employee contribution limit is moved up to $20,500 in 2022. Employees aged 50 or older may contribute a catch-up amount of $6,500 if the plan allows. Furthermore, after age 59 ½, 403(b) allows rollovers and distributions without a 10% penalty, before that age, employees have to pay the penalty depending on the plan.

After the Economic Growth and Tax Relief Reconciliation Act of 2001, plan 403(b) has tax treatment similar to a 401(k) plan.

403(b) plans are called Tax-sheltered annuity (TSA) as well, but since 1974 they are not restricted to just annuity form but participants can also invest in mutual funds.