403(b) Plan

What Is a 403(b) Plan?

A 403(b) plan is a retirement savings plan offered by public schools and certain nonprofit organizations. 403(b) plans are also known as tax-sheltered annuity plans or TSA plans.

This plan, similar to the more well-known 401(k) plan, allows members to save for retirement through payroll deductions while receiving tax benefits. The sponsoring company can also match a portion of the employee's contribution. Use the 401(k) plan comparison tool, and explore if a sustainable 401(k) plan is a better fit for your company. 

How the Plan Works

With a 403(b) plan, employees can choose to have a portion of their paycheck deducted and placed into the account. The money is then invested and allowed to grow tax-deferred. 

This means taxes are not paid on the money until it is withdrawn from the report, typically at retirement.

The 403(b) plan has the same annual contribution limits as 401(k) plans. For the tax year 2022, the maximum contribution is $20,500. In 2023, the contribution limit is $22,500.

The proposal also includes a $6,500 catch-up payment for anyone over 50 in 2022, which increased to $7,500 in 2023. 

Employee and employer contributions combined are restricted to the lesser of $61,000 in 2022 ($66,000 in 2023), or 100% of the employee's most recent yearly earnings. 

Participants must achieve the age of 59 1/2 before withdrawing money or face an early withdrawal penalty.

403(b) vs 401(k)

In many aspects, 403(b) plans are comparable to 401(k) plans. Both retirement savings programs provide tax advantages and allow employees to contribute through payroll deductions.

The primary distinction is that 403(b) plans are exclusively offered to workers of public schools and select tax-exempt organizations. On the other hand, employees at for-profit businesses have access to 401(k) plans.

Eligibility

The following are the individuals to be eligible to participate in a 403(b) plan.

• Employees of tax-exempt organizations are described in Section 501(c)(3) of the Internal Revenue Code;
  
• Employees of public education systems;
  
• Church personnel;
  
• Employees of Indian tribal governments' public school systems;
  
• Ministers working for Code Section 501(c)(3) organizations;
  
• Self-employed preachers who are classified as employees of a qualified tax-exempt organization; and
  
• Ministers (chaplains) who satisfy both of the following criteria:

They work for organizations that are not tax-exempt under Code Section 501(c)(3), and

In their day-to-day professional obligations to their employers, they act as ministers.

403(b) Plan Features

The 403(b) plan has the following features:

Contribution

Payroll deductions allow employees to contribute to their 403(b) plans. The amount that can be contributed is subject to yearly IRS limitations. The maximum contribution for the tax year 2022 is $20,500 ($22,500 in 2023).

The proposal also includes a $6,500 catch-up payment for anyone over 50 in 2022, which increases to $7,500 in 2023.

Employee and employer contributions combined are restricted to the lesser of $66,000 in 2023 ($61,000 in 2022), or 100% of the employee's most recent yearly earnings.

Plan Investment

Assets in a 403(b) plan can be invested in any of the following asset classes:

• an annuity contract offered by an insurance provider;
  
• a mutual fund-invested custodial account;
  
• a retirement income plan established for church personnel

Loans and Distributions

A 403(b) plan allows loans. If approved, employees may get a loan to the amount and in the manner permitted by the plan.

Hardship distributions are also permitted but not required in a 403(b) plan. Participants may seek a hardship distribution to the extent and in the manner permitted by the plan.

Advantages of 403(b) Plans

The 403(b) plan offers the following advantages:

• Employees can contribute to their 403(b) plans through payroll deductions.
  
• The 403(b) plan has the same annual contribution limits as 401(k) plans. For the tax year 2022, the maximum contribution is $20,500. In 2023, the limit is $22,500.
  
• The proposal also includes a $6,500 catch-up payment for anyone over 50 in 2022 and $7,500 in 2023.
  
• 403(b) plan assets can be invested in various investment options, including annuity contracts, mutual fund-invested custodial accounts, and retirement income plans.
  
• 403(b) plans offer the same tax benefits like 401(k) plans. Contributions are made with pre-tax dollars and grow tax-deferred. Withdrawals are taxed as ordinary income.
  
  

Disadvantages of 403(b) Plans

The 403(b) plan offers the following disadvantages:

• 403(b) plans are only available to public school employees and employees of certain tax-exempt organizations. Employees of for-profit companies are not eligible to participate in a 403(b) plan.
  
• 403(b) plans are subject to the same rules and regulations as 401(k) plans. This can make them difficult to administer and maintain.
  
• 403(b) plans often have high fees, affecting returns.

Final Thoughts

The 403(b) plan is a tax-advantaged retirement savings plan available to employees of public schools and specific tax-exempt organizations. 403(b) plans have the same contribution limits as 401(k) plans and offer the same tax benefits.

It would help if you kept in mind that 403(b) plans are subject to the same rules and regulations as 401(k) plans, making them difficult to administer and maintain. Additionally, 403(b) plans often have high fees, which can eat returns.

It would help to consider your unique financial situation and investment goals when contributing to a 403(b) or another retirement savings plan.

FAQs

1. What is a 403(b) plan?

This plan is a tax-advantaged retirement savings plan available to employees of public schools and specific tax-exempt organizations. 403(b) plans have the same contribution limits as 401(k) plans and offer the same tax benefits.

2. How much can I contribute to a 403(b) plan?

For the tax year 2022, the maximum contribution limit is $20,500. Employees over 50 can make a catch-up contribution of $6,500. In 2023, the contribution limit is $22,500 and the catch-up contribution is $7,500.

3. What are the advantages of 403(b) plans?

The advantages of 403(b) plans include the following: employees can contribute to their 403(b) plans through payroll deductions; the 403(b) plan has the same annual contribution limits as 401(k) plans; 403(b) plan assets can be invested in a wide variety of investment options; 403(b) programs offer the same tax benefits like 401(k) plans.

4. What are the disadvantages of 403(b) plans?

The main disadvantages of 403(b) plans are that they are subject to the same rules and regulations as 401(k) plans, making them difficult to administer and maintain. Additionally, 403(b) plans often have high fees, which can eat returns.

5. Who is eligible to participate in a 403(b) plan?

Employees of public schools and certain tax-exempt organizations are eligible to participate in a 403(b) plan.