What is a 403(b)?
The 403B is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501C Contributions and investment earnings in a 403B grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.
Why Contribute to a 403(b)?
A Healthy Retirement - Most employees of educational institutions and other non-profit organizations are provided with a pension upon retirement. Few pension plans, however, provide an amount equal to salary. A 403(b) plan can provide a healthy supplement to a pension.
Contributions may help:
Lower Taxes - 403(b) contributions are made on a pre-tax basis which can greatly reduce your tax bill. Generally, if you contribute $100 a month to a 403(b) plan, you've reduced your Federal income taxes by roughly $25 (assuming you are in the 25% tax bracket). In effect, your $100 contribution costs you only $75. The tax savings are magnified as your 403(b) contribution increases.
More Tax Savings - all dividends, interest and capital gains accumulate in a 403(b) account on a tax-deferred basis. This means your earnings will grow tax-free until time of withdrawal.
Will participation in a 403(b) plan reduce Social Security benefits?
No. Salary reduction contributions to a 403(b) reduce taxable compensation for federal (and in most instances, state) income tax purposes only. Those contributions do not reduce wages for the purpose of determining FICA taxes or determining social security benefits.
Will participation in a defined benefit plan (pension/TRS) affect one's ability to contribute the maximum elective deferral limit to a 403(b) plan?
No. The elective deferral limit is a taxpayer limit, meaning that your maximum contribution to all plans cannot exceed the annual limit. However, your mandatory contribution to the state defined benefit plan is not considered an elective deferral, so it doesn't reduce your annual limit. Therefore, you are able to participate in your state's defined benefit plan and contribute the maximum allowable to your 403(b) plan.
