Also referred to as a tax-sheltered annuity (TSA), is a retirement plan established by a nonprofit- tax-exempt organization as described under IRC § 501(c)(3), public school systems including those organized by Indian tribal governments, cooperative hospital service organizations, Uniformed Services University of the Health Sciences (USUHS) for their employees, and certain ministers.
Under a 403(b) plan, eligible employees may defer a portion of their wages/salary to their account under the plan. These deferred amounts are referred to as Salary-Deferral Contributions, and can be made on a pre-tax and/or post-tax basis.
Contributions under a 403(b) plan can be invested in :
- An annuity contract as described under IRC § 403(b)(1),
- A custodial account as described under IRC § 403(b)(7) , where investments are limited to regulated investment companies described in IRC §851(a)(1)(A): or
- A retirement income account as described under IRC § 403(b)(9), for which there is usually no restriction on investments
Earnings in a 403(b) account grow on a tax-deferred basis and distributions are treated as ordinary income
Individuals may defer up to 100% of their compensation up to the dollar limit that is in effect for the year. Individuals who reach age 50 by the end of the year may defer additional amounts referred to as ‘Catch-up’ contributions.
The dollar limits are available here.
These are the limits established under federal law. However, an employer may elect to reduce the percentage of salary that an employee may defer to its 403(b) plan. For instance, the plan may be designed to limit Salary Deferrals to 10% of compensation. In such a case, if the individual’s compensation for the year is $70,000, the maximum amount he/she can contribute as salary deferral contributions for the year is $7,000 ($70,000 x 10%).
403(b)s are subject to other rules that may allow contributions in excess of these amounts. For example, the 15-year rule.
Employers may choose to make matching contributions to the accounts of employees who make salary deferral contributions.
(Source: Retirement Dictionary)