Q:

What is a 401b plan?

A:

Quick Answer

There is no such thing as a 401(b) plan, but according to the official website of the Internal Revenue Service, a 403(b) plan is a retirement plan similar to a 401(k) plan that allows employees to contribute a portion of their salaries into individual retirement accounts. Employers eligible for this plan include public schools, churches and other tax-exempt organizations.

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Full Answer

The numbers of the 403(b) and 401(k) plans refer to the sections of the tax laws that describe them. The main difference between the two is the type of employers that can offer them. However, 403(b) plans also offer a narrower range of investment opportunities. Just as in a 401(k) plan, employers of beneficiaries of 403(b) plans are able to match payroll-deducted contributions, which is an employment incentive. These contributions grow tax-free, often for decades, resulting in a significant increase in the initial investment. The funds are only liable to taxation when they are withdrawn after retirement. However, if the money is withdrawn prematurely for an emergency, there is a significant tax penalty.

The limit on annual additions to a 403(b) plan was $52,000 as of 2014, which is the total amount of employee salary deferrals and employer contributions. This amount can be slightly increased through catch-up provisions. Under the terms of the plan, the participant must begin receiving distributions by April 1 of the year he turns 70.5.

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