How Does 403b Plan Work and What is a 403b Plan

A 403(b) is a “save now, pay later” plan. By an arrangement with your employer, you reduce your salary in order to set money aside from pre-tax money for retirement. You may choose from the various vendors your employer may offer in order to pick the best choice for your long-term investment. The money will then grow tax-free each year until you withdraw it when you retire.

What is a 403b plan and how does 403b work
The 403(b) comes as a tax-deferred plan for retirement especially for educational institutions, churches, and other non-profit organization’s employees (Internal Revenue Code section 501(c)(3) determines tax exemption status). Both investment earnings and contributions in the 403(b) will grow tax-deferred until you withdraw typically at the time of retirement. When you withdraw from the plan, the tax is the same as the current income tax. See Publication 571 from the IRS for the specifics on a 403(b). Obtain this publication when you call 1-800-829-3676 or go to their website.

When did the 403(b) become available?
The federal government established the 403(b) in 1958 to motivate employees of organizations with tax exemption to build their retirement savings. The name, of course, references the specific Internal Revenue Code section.

Who can benefit from a 403(b)?
Tax-exempt organizations which have been established under the 501(c)(3) section in the IRS Code may offer this program to their employees. Most often professionals reference these organizations as “501(c)(3) organizations.” Participants may include school administrators, teachers, professors, school personnel, doctors, nurses, librarians, researchers, and ministers.

Why enroll in a 403(b)?
Substantial Retirement. Even though most non-profit organizations and educational institutions offer a retirement pension, few of these plans, however, will provide a salary level income. The 403(b) plan may provide a healthy pension supplement.
Lower Taxes. Since you make contributions on pre-tax money, you will heavily reduce your annual taxes. If you put $100 per month into your 403(b) plan, generally you will reduce your Federal-level income taxes by about $25 (if your tax bracket is in the 25% range). Your $100 deposit will then only cost you $75. The true savings are realized as the interest accrues in the 403(b) account.