What Is a 403(b) Plan, and Why Should You Have One?

A tax-sheltered annuity (TSA) plan is a 403(b) plan. Employees of tax-exempt organizations are eligible for this type of plan. These retirement savings plans may be included in an employee's benefits package. Both parties can benefit from a 403(b) plan.

A 403(b) Plan's Definition and Example

A 403(b) plan is a kind of retirement plan sponsored by an employer. Employees can request that their employers defer a portion of their pay to these retirement accounts so that the earnings are not taxed until they are withdrawn later. Employers have the option of matching employee contributions. A tax-Sheltered annuity is another name for a tax-deferred annuity. TSA plan is an acronym for Tax-Sheltered Annuity. A 403(b) plan can only be offered to employees by certain types of employers. Employers who are eligible must be tax-exempt organizations, such as:

Churches
Hospitals that are not for profit
Universities or public schools
Charitable organizations with a 501(c)(3) status

How Does a 403(b) Plan Work?

You will have the same options for investing your money in a 403(b) plan as you do in a 401(k). You can invest in low-, medium-or high-risk options. To encourage employees to save for retirement, your employer may offer a "match." Your contributions may be matched up to a specific percentage of your salary. If your employer offers a 9% match, that means that if you invest 9% of your salary, your employer will match that amount in your 403(b) plan. Your employer will match your contribution even if you only put in 4%. However, if you put in 12 percent, your employer will only match up to 9 percent. A 403(b) is a tax-deferred savings account. Pre-tax contributions and earnings aren't taxed until the funds are distributed from the plan. A 403(b) account can grow tax-free for decades. When you start taking withdrawals from your 403(b), you will only have to pay taxes on the funds (b). If your total income is below certain thresholds, you may be able to claim the Savers Credit for contributions to your 403(b) plan when filing your taxes (b). You can borrow money from a 403(b) in an emergency, but just like 401(k) loans, 403(b) loans must be repaid. If you don't, you'll be hit with a hefty tax bill. By speaking with a human resources representative at your company, you can balance your 403(b) portfolio between riskier and safer investments. A financial advisor is also a good option. When you've been with your employer for a certain amount of time and have vested in your 403(b) plan, you own it. (The length of time depends on your employer and your plan's rules.) With every additional year of employment, the percentage of your vesting increases. If you're fully vested, your employer won't be able to take back any contributions. After you've vested in the plan, you can take the money with you if you change jobs, but you may need to roll it over into an IRA account. You'll lose your employer's contributions if you leave your job before you've reached a vested status, but you'll keep the money you've put into your plan yourself. Any contributions you make as an individual to the plan are always fully vested (i.e., owned by you). Some employers will require you to roll over your account, while others will allow you to keep your current plan as long as you maintain a certain balance. Your HR representative should be able to answer your questions or put you in touch with someone who can.

401(k) Plans vs. 403(b)

There are some similarities between TSA plans and 401(k) plans, but there are some differences.

403(b) Plans	401(k) Plans
Organizations that are exempt from paying taxes	Companies that are for profit.
An employer match is possible.	ERISA rules apply to employer-to-employee matches.
Only annuities and mutual funds are available as investment options.	Annuities, mutual funds, stocks, and bonds are all viable investment options.

How Much Can You Put Into a 403(b) Plan?

The federal government sets relatively high contribution limits for 403(b) plans. In most years, these figures are increased to account for inflation. The lesser of: the total contributions to your 403(b) in 2022 (made by both you and your employer) or the lesser of: the total contributions to your 403(b) in 2022 (made by both you and your employer) or the total contributions to your 403(b

$61,000
100 percent of your total pay for the most recent year of employment with that company

If you've worked for your company for 15 years or more, you may be eligible for catch-up contributions, which increase the amount of your salary you can contribute by the lesser of:

$3,000
This rule requires that any additional contributions you made in prior years be deducted from your $15,000 in the amount of such additional contributions.
$5,000 multiplied by the number of years you've worked for the organization, minus the total of any previous contributions
You may add another component to your catch-up contributions if your plan permits it and you are 50 years of age or older. Your 403(b) plan can be increased by $6,500 in 2022.
Each year, you should aim to save around 15% of your income for retirement. That total includes your employer match as well.

Tip: Take full advantage of your employer match whenever possible. It, like your salary and other benefits, is part of the compensation package for your position. Consider investing up to the full amount that your employer will match in your 403(b) plan. You could increase your contributions each time you get a raise until you reach your IRA contribution limit. If you still have funds to invest for retirement, you can go back to your 403(b) until you reach the 15 percent goal.

Important Points to Remember

A 403(b) plan is a tax-deferred annuity plan that is offered by tax-exempt employers.
Contributions to a 403(b) plan are not taxed until they are withdrawn. Your investment will grow tax-free.
The only investments available are annuities and mutual funds, which are similar to 401(k) plans.