What is a 403(b) Plan?
A 403(b) plan is a type of tax-advantaged retirement savings plan designed for certain employees of public schools, tax-exempt organizations, and some ministers. It allows employees to save a portion of their income for retirement on a pre-tax basis, reducing their taxable income.
Eligibility
Eligibility for a 403(b) plan typically includes employees of public schools, non-profit organizations, and religious institutions. Unlike 401(k) plans, which are offered by for-profit companies, 403(b) plans cater primarily to the non-profit sector.
Tax Benefits
Contributions to a 403(b) are made before taxes are deducted, lowering the employee’s taxable income. Investment gains within the account are tax-deferred until withdrawals are made, typically during retirement when the individual may be in a lower tax bracket.
Contribution Limits
For 2023, employees can contribute up to $22,500 annually. Individuals age 50 and older may contribute an additional $7,500 as a catch-up contribution, totaling $30,000. Employers can also make contributions to the employee’s plan.
Withdrawal Rules
Funds in a 403(b) plan generally can be accessed without penalty after the age of 59½. Early withdrawals may incur a 10% penalty, in addition to ordinary income tax, though certain exceptions apply.
In summary, a 403(b) plan is an essential tool for retirement planning, especially for employees in non-profit sectors, providing significant tax benefits and flexible contribution options.