403(b)

Definition

A 403(b) plan is a retirement savings plan available to employees of certain public schools, tax-exempt organizations, and ministers. It allows for employee contributions through salary deferrals and may include employer contributions.

5 Must Know Facts For Your Next Test

1. 403(b) plans are similar to 401(k) plans but are designed for specific employers like public schools and non-profits.
2. Employee contributions to a 403(b) reduce taxable income in the year they are made.
3. Employers may match employee contributions or make discretionary contributions to the plan.
4. Contributions limits for a 403(b) are set by the IRS and can change annually.
5. Early withdrawals from a 403(b) before age 59½ may be subject to a penalty tax.

Review Questions

• What types of employers typically offer a 403(b) plan?
• How do employee contributions to a 403(b) affect taxable income?
• What is one potential consequence of withdrawing funds from a 403(b) before age 59½?

Related terms

401(k): A retirement savings plan offered by private sector employers that allows employee contributions through payroll deductions.

Salary Deferral: A portion of an employee's earnings that is paid directly into a retirement plan, reducing their taxable income.

Employer Match: Contributions made by an employer to an employee's retirement plan based on the employee's own contribution amount.