Understanding 403b Plans
A 403b plan, also known as a tax-sheltered annuity (TSA), is a retirement savings plan specifically designed for employees of public schools, colleges, universities, churches, and certain nonprofit organizations. Named after Section 403(b) of the Internal Revenue Code, these plans provide tax-deferred growth and allow employees to reduce their taxable income through pre-tax contributions.
Like 401k plans, 403b plans enable employees to save for retirement while reducing their current income taxes. The funds grow tax-free until withdrawal, typically in retirement when most people are in a lower tax bracket.
Key Features of 403b Plans
Pre-Tax Contributions
Contributions reduce your current taxable income, lowering your federal and state income taxes for the year.
Tax-Deferred Growth
Investment earnings grow without being taxed annually, allowing your money to compound over time.
Employer Matching
Many employers offer matching contributions, effectively increasing your retirement savings automatically.
Portability
If you change employers, you can often roll your 403b balance into another plan or IRA.
2024 403b Contribution Limits
Early Withdrawal Rules
Standard withdrawals before age 59½ are subject to a 10% early withdrawal penalty in addition to income taxes. However, there are several exceptions:
- •Separation from Service at 55+: No penalty if you separate from employment at age 55 or older
- •Disability: No penalty if you become disabled before age 59½
- •Medical Expenses: Unreimbursed medical expenses exceeding 7.5% of AGI
- •Substantially Equal Periodic Payments: No penalty if taking periodic distributions
- •Hardship Distributions: Limited no-penalty access in cases of financial hardship
Required Minimum Distributions (RMDs)
The SECURE 2.0 Act changed the RMD age requirement. Beginning January 1, 2023, employees must begin taking Required Minimum Distributions by April 1 of the year following the year they turn 73. Previously, the age was 72, and before that it was 70½. RMDs are based on your life expectancy and account balance, calculated using IRS life expectancy tables.
403b vs. 401k: Key Differences
| Feature | 403b | 401k |
|---|---|---|
| Employer Type | Nonprofits, schools, clergy | For-profit companies |
| Contribution Limits | $23,500 ($31,000 at 50+) | $23,500 ($31,000 at 50+) |
| Investment Options | Annuities and mutual funds | Broader investment selection |