TECHNICAL GLOSSARY

What Is a 403(b) Plan?

A 403(b) plan is a retirement savings program for employees of public schools, nonprofit organizations, and other qualifying tax-exempt organizations—all of these types of organizations are covered by IRS rules. These plans are similar to 401(k) plans; however, they have been designed for nonprofit and public-sector employees.
By participating in 403(b) plans, qualified individuals have the ability to contribute part of their salary on a pre-tax basis; thereby, lowering their current taxable income, while they save money for retirement. Many employers will match contributions made by their employees, thus increasing the total funds available to employees at retirement considerably.

How Does a 403(b) Plan Work?

Your employer can deduct all amounts contributed to a 403(b) plan directly from your paycheck prior to applying federal income taxes. The investment income then grows tax deferred until you pull money out during retirement.
Typically your 403(b) plan will have a number of investment options, including:

• Annuities
• Mutual funds

What particular options you can choose will depend on the 403(b) structure established by your employer.

How 403(b) Withdrawals Work in Retirement

When you retire or leave employment, you may begin taking withdrawals from your 403(b) account and the IRS determines the rules regarding distributions from your 403(b) account.
Your common distribution options are:

1. Lump sum - You can take all of the balance out of your account in one lump sum. This may be a good option, if you have significant expenditures, but it will likely result in paying additional taxes for that year on the lump sum amount.
2. Periodic payments - You can take periodic payments out of your account at regular intervals, either by choosing fixed amounts to be paid or by choosing to withdraw a fixed percentage of your balance at regularly scheduled intervals. Periodic payments are a common option for providing retirement income to cover your expenses. If you take a withdrawal prior to age 59 ½, you will be subject to ordinary income taxes as well as a 10% early withdrawal penalty unless one of the IRS exceptions is available to you.

403(b) vs. 401(k): What’s the Difference?

The first difference is who provides the plan:

• The 403(b) Plan is designed for employees of not-for-profit entities (including public educational institutions) or an entity which has been approved to be tax-exempt by the IRS.
• The 401(k) Plan is designed for employees of for-profit Private Employers.

Both the 403(b) and 401(k) plans generally have similar contribution limits and tax treatment as allowed under the IRS; however, many of the investment options available in a 403(b) plan may be significantly fewer than what you would find in a 401(k) plan