403(b) Plan

Definition

Also known as a tax-sheltered annuity, 403(b) plans grew in popularity following the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001.  These retirement accounts are similar to 401(k) plans, except they are offered to employees of nonprofit organizations such as:

  • Public schools, colleges, and universities
  • Public hospitals
  • Churches
  • Not-for-profit organizations, or 501 (c) (3) organizations

Explanation

Tax-deferred contributions can be made to 403(b) plans as well as after-tax contributions.  Employers may match a portion of their workers' contributions to encourage participation.  Plan accounts grow on a tax-deferred basis until withdrawn.  Roth 403(b) contributions, introduced in 2006, are not taxed when withdrawn.

Money placed into the account can be professionally managed or directed by the accountholder to investments selected by the plan's administrator.  Investments typically consist of annuities established with insurance companies as well as mutual funds.

For the calendar year 2016, an employee can contribute up to $18,000 on a pre-tax basis, which is the same as the $18,000 limit that applied in 2015.  Workers age 50 or more by December 31st are eligible for an additional catch-up contribution of $6,000 in 2016, which is the same as the $6,000 limit in 2015.

The IRS has established rules for both plans and participants.  These rules include contribution limits, withdrawals, minimum distributions, and rollovers. Our article 403(b) plans has up-to-date information on both contributions as well as plan rules.

Related Terms

401(k) plan, employee benefits, individual retirement account