403(b) Guide - Basics For Retirement Planning

retirement-403b-planA 403(b) plan is an employer sponsored retirement plan. Usually 403(b) plans are offered by school districts and other educational institutions, although certain non-profit organizations may offer them.

A 403b plan is also called a Tax Sheltered Annuity plan, or TSA plan. It functions much like a 401(k) plan does.

Employees can contribute to a 403(b) plan via salary reductions or salary deferrals into their 403(b) plan. The 403(b) contribution limits for 2011 and 2012 are $16,500 per year. If the plan allows for it, certain employees with at least 15 years of service may contribute an additional $3,000 per year to a 403b plan.

Employers may match employee contributions or make other non-elective retirement plan contributions into the employee's 403(b) account as well. Generally, the 403(b) total contribution limits are $49,000 per year. However, in no case may the contributions to a 403b plan exceed the employee's total compensation for the year.

For example, if an employee earns more than $49,000 per year and contributed the annual 403(b) contribution limit of $16,500, then the employer contributions to the employee may total no more than $32,500.

If an employee earns $40,000 per year and contributes the maximum to the 403(b) plan ($16,500) then the employer may contribute no more than $23,500 because the total contributions may not exceed the employee's compensation of $40,000.

403(b) Versus 401(k)

The most common question about a 403(b) is how it differs from a 401(k) plan.

The difference between a 403(b) and a 401(k) is complex. However, the differences are mainly on the employer side. That is, that while setting up and administering a 403b vs 401k plan is very different, the differences for employees are much smaller.

How 401(k) and 403(b) Are The Same

  • Funded by salary reduction (contributing a percentage of your salary)
  • May be matched by employer
  • Contributions made with pre-tax dollars
  • Withdrawals before age 59 1/2 penalized
  • Employee may contribute up to $16,500 annually in most cases

Convert 403(b) To Roth IRA

403(b) accounts can be converted to a Roth IRA just like traditional IRAs may be converted to a Roth IRA and 401(k) plans can be converted to a Roth IRA.

As with all Roth IRA conversions, you must pay taxes on all funds inside the account with the exception of any non-deductible contributions made.

More Retirement Planning Guides

Retirement planning information at Finance Gourmet

Roth IRA information

401(k) Guide

Types of IRA Guide

401(k) Contribution Limits