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What is a 403(b) Plan?

A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the Untied States.  It has tax treatment similar to a 401(k) plan for employees in the private sector.  Similarly, other plans used by some municipal governments or public entities are 401(a) and 457(b) Deferred Compensation Plans.

Employee salary deferrals into 401(k) and 403(b) plans are made before income tax is paid, and contributions are allowed to grow tax-deferred until the money is distributed to the individual, normally at retirement.  Distributions generally cannot be made (other than for specific economic conditions) until the individual reaches age 59 ½, and distributions are required to be made starting at age 70 ½.  When distributions are paid to the individual, the amount of the distribution is treated as income for that particular tax year.

403(b) plans are also referred to as “tax-sheltered annuities (TSA’s)”, although since 1974 they no longer are restricted to an annuity form, and participants can now invest in mutual funds, which may have lower expense costs.

Beginning in 2006, 401(k) and 403(b) plans may also include designated Roth IRA contributions, i.e., after-tax contributions, which will allow tax-free withdrawals if certain requirements are met.  Primarily, the designated Roth contributions have to be in the plan for a least 5 taxable years.