What Is a 403(b) Plan?

A 403(b) plan is a retirement plan for certain employees of public schools, tax-exempt organizations and ministers. Individual 403(b) accounts are established and maintained by eligible employees.

Accounts under a 403(b) plan can be one of the three following types:

  • an annuity contract provided through an insurance company; these 403(b) annuity plans are also known as tax-sheltered annuities (TSA’s) and tax-deferred annuities (TDA’s).
  • a custodial account provided through a retirement account custodian; investments are limited to regulated investment companies, such as mutual funds.
  • a retirement income account, for which investments options are either annuities or mutual funds.

The employer may determine the financial institution(s) at which individual employees may maintain their 403(b) accounts.

Why Establish a 403(b) Account?

The following are advantages of maintaining a 403(b) plan or account:

For the employer:

  • attractive benefits that help keep high-quality employees happy.
  • shared cost of funding between employers and employees (in some cases, only employees contribute to the 403(b) plan).

For the employee:

  • reduced taxable income through pre-tax contributions.
  • tax-deferred earnings on plan contributions.
  • likelihood of paying less tax on assets as distributions usually occur during retirement, when an employee may be in a lower tax bracket.
  • the ability to take loans from the 403(b) accounts.