What is a 403b Plan? 403b Distributions & Contributions? Advantages & Disadvantages of 403b Plans
403b plans are retirement savings plans that allow you to make annual dollar contributions (just like 401k plans) and let them grow tax-deferred up until you withdraw them (upon retirement). Note the fact that 403b plans allow for pre-tax contributions (that is from your Gross Wage). Go here to read about the distinctions between pre-tax and after-tax 401k contributions. 403b plans are also known as tax-deferred annuities.
403b Plans are engineered for employees of tax-exempt organizations such as:
Since your contributions towards a 403b plan come out of your GROSS WAGE, this means you will be lowering your current taxable income by the amount of the contribution. This means you will be paying lower taxes NOW!
Advantages of 403b Plans
- As mentioned above, your lower your current taxable income by contributing towards a 403b plan. This also allows your contributions to grow tax-deferred up until withdrawal. All the years of compounding interest will surely add up!
- When you retire, chances are higher that you will be in a lower tax bracket (because you will have quit your job). Therefore, apart from lowering your current taxable income, you also lower the taxes you will pay upon retirement (and maturity of your 403b plan).
- The 403b contributions are automatically deducted from your paycheck, therefore you have no worries about the administration of your contributions.
- 403b plans allow you to choose where your money is invested in. Go here to read more about 401k and 403b investment options.
403b Plan Contributions
The maximum pre-tax 403b contributions that you are allowed to make is $17500 in 2014.
403b Catch Up Contributions
Furthermore, certain special employees who have served in any type of organization (listed above) for more than 15 years or more are allowed to make an extra pre-tax contribution of $3000 per year towards their 403b plans.