The Internal Revenue Service, under IRC Section 403(b), created a pre-tax retirement benefit for employees of 501(c)(3) not-for-profit institutions. These institutions include colleges and universities, hospitals, museums, research institutes, foundations and most importantly, employees of public schools. Participants may set aside money for retirement on a pre-tax basis through a 403(b) plan offered by their employer. To encourage not-for-profit employees and teachers to save for retirement, the federal government provided some exclusive tax advantages.

403(b)/ Features

The two main reasons for participating in a 403(b) are (1) to help reduce your current year federal income tax liability and payment, and (2) to help build a retirement nest egg with these pre-tax saved dollars that then compound tax-deferred until retirement when you need them.

How does the 403(b) work?

First, you decide on the amount of money you want to save out of each pay check and contribute into your 403(b). Several limitations determine the most that can be contributed. The absolute maximum contribution amounts for 2022 for everyone who earns at least $20,500 is $20,500; and if age 50 or older, $27,000. Next, choose a provider approved by your employer and together decide where to invest the contributions. Choices available for 403(b) include fixed interest annuities, variable annuities, and mutual fund accounts.

How important is 403(b)?

TSA works in addition to your state pension and retirement system benefits. Your retirement system will provide you generous benefits; however, it is unlikely that you will be able to maintain your standard of living throughout retirement unless you augment your state pension benefits with your own savings and investment program. 403(b) is the supplemental retirement account where you determine the amount of future income.

Withdrawals are taxed as ordinary income in the year received.  Tax penalties and penalties for early withdrawal may apply if funds are withdrawn prior to age 59 ½.