Q:

What is a 403(b) retirement plan?

A:

Quick Answer

The U.S. Internal Revenue Service describes 403(b) retirement plans as plans that allow an employee to defer a percentage of his pre-tax income into an account where taxes remain deferred until distribution. These plans work similarly to the 401(k) plans offered by for-profit organizations, but 403(b) plans are only available to employees of public education systems, churches and tax-exempt charities and non-profits.

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What is a 403(b) retirement plan?
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Full Answer

According to the IRS, 403(b) plans allow an employee a high level of flexibility when determining how much to contribute to his retirement savings accounts. Some employers elect to fully or partially match an employee's contributions, but they are not required to do so. An employee may contribute up to $17,500 a year, but this amount is lowered if he also contributes to other types of retirements accounts, including Roth accounts and 401(k) plans.

The IRS states that one of the disadvantages of a 403(b) plan is that an employee's investment options are limited to those selected by the employer. Some of these investment options also come with high administrative fees that cut into the account's total profit. An employee is allowed to withdraw from his 403(b) account when he reaches age 59 1/2. At the time of withdrawal, taxes are assessed on the account. Withdrawals from these accounts are also permitted if an employee loses his job, is disabled, dies or experiences a qualified financial hardship.

Sources:

  1. irs.gov
  2. irs.gov

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