What is a 403(b) and can I get one through my employer?
A 403(b) plan is tax-sheltered annuity (TSA) plan, is a retirement plan for employees of public school systems, employees of certain tax-exempt organizations, and certain ministers.
Additionally, the following organizations may offer a 403(b) plan:
- A tax exempt 501 (c) organization (not for profit) such as corporations organized for charity, religion, education, science, literacy, testing for public safety, fostering national or international sports competition, and the prevention of cruelty to children or animals.
- Cooperative hospital service organizations
- Uniformed Services University of the Health Sciences
- Public School Systems organized by Native American tribal governments.
Once an organization offers a 403(b) plan, the employees must adopt a written plan before it can be offered. The benefits of a 403(b) plan is that it allows a higher annual contribution of up to $18,000 (in 2016) for those younger than 50 years old, and an additional catch-up contribution of $6,000 for a total of $24,000 (in 2016) if 50 years of age or older. Also, if an employee has worked in the same nonprofit for 15 years, he may also have access to additional catchup provision of $3,000 per year up to 5 years (if annual contributions were less than an average of $5,000 in previous years.
The catch has been that usually the 403(b) plans have had more limited investment options than its cousin, the 401(k); enough limited offering that the plan has also been referred to as the annuity plan. Today, it seems options have improved. Are you wondering whether to put your money in the 403(b) or an IRA? If your employer offers matching funds, contribute to that plan first. That is money that you would not have to contribute to the fund. If your income exceeds $89,000 (based on a joint return) the 403(b) plan will phase out the deductibility of the IRA contributions, so use the 403(b).
If your joint income is less than $89,000, take advantage of the IRA after you get the maximum matching dollars from your employer.