How does a 403b work?


How does a 403b work?

In: Economics

A 403b is essentially the same as a 401k plan, but they are retirement plans that are offered by schools, universities, state or city offices, or non-profit organizations. It’s the IRS code that allows this type of retirement plan.

You can save your money on a pre-tax basis, and you may or may not receive a matching contribution. The money is intended to be used for retirement, and it is taxed when you take it out.

A 403(b) plan is like a 401(k) plan for tax-exempt organizations; most of what you read about the more common 401(k) plans will apply.

When you have money withheld from your pay to contribute to the plan, that is not counted in your federal taxable income, so you save on tax right now. (You may or may not save on state or local tax as well; it varies.) Each plan has investment options; money from those investments is not taxable either. At some jobs, you get a contribution from your employer is well. So a 403(b) plan lets you save and invest money for retirement while saving on taxes, allowing you to save faster compared to regular investments.

When you withdraw money from the plan you have to pay income tax on the whole withdrawal, which is why these plans are called *tax-deferred*. Because it’s supposed to be for retirement, if you withdraw it before you turn 59-and-a-half there is a 10% additional tax as well, although there’s a few exceptions for hardship situations. Instead of withdrawing it you can do a *rollover* into a Traditional IRA at a bank, which has similar rules, and this avoids you having to pay the penalty for early withdrawal if you leave that job for example.

Follow-up question: I’ve spent my whole career working for 403(b) institutions, so I’ve never worried about the difference between a 401(k) and a 403(b). Are there any meaningful differences between the two, for me as a beneficiary?