The 403(b) can be an excellent way to save money for retirement. It can serve as a supplement to a traditional pension plan or other retirement plan(s), or as a stand-alone plan. The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. The 403(b) is named after the section of the IRS code governing it.
How a 403(b) Works
Employees enroll and participate through their employer. Contributions to a 403(b) are made on a pre-tax basis through a Salary Reduction Agreement. This is an arrangement where the participating employee agrees to take a reduction in salary. The amount by which the salary is reduced is directed to investments offered through the employer and selected by the employee. These contributions are called elective deferrals and are excluded from the employee’s taxable income. Contributions grow tax-deferred until the time of retirement, when withdrawals are taxed as ordinary income.
- Tax deferred growth: no annual taxation on earnings
- Investment options: fixed annuities, variable annuities, or mutual funds
- Competitive interest rates
- Flexibility: start, stop, and adjust your contributions as allowed by your employer’s plan.
- Receive periodic account statements
- Participants may contribute up to $20,500 for 2022.
- Participants aged 50 and older at any time during the calendar year are permitted to contribute an additional $6,500 in 2022, for a total of $27,000.