Understanding a 403 (b) Plan

by Investing School on May 14, 2012

There are many different types of retirement plans but the 403 (b) is specifically designed for certain public school employees, people who work at tax-exempt organizations and self-employed religious leaders. These accounts are set up and maintained by individuals who qualify.

Employers may choose to contribute to such plans but that can complicate the legal requirements involved. Without such contributions the plan does not have the same technical challenges inherent in a 401 (k) and saves effort from an administrative perspective.

There are three types of 403 (b) plans a person may choose from:

  1. A 403 (b) can be set up as an annuity contract provided by an insurance company. This sort of plan is also referred to as a TSA (tax-sheltered annuity) or a TDA (tax-deferred annuity).
  2. The 403 (b) can be set up as a custodial account which is provided through a retirement account custodian. Investments in such accounts are restricted to such funds as mutual funds which are regulated.
  3. The final option is a retirement income account which allows investment in both annuities and mutual funds.

Employers may restrict which financial institutions are used to maintain the account and that can help determine how the 403 (b) will be established. For the employees there are certain advantages of initiating such an account: decreased taxable income, tax free income and the odds that they will pay less tax on the assets when disbursed during retirement.

Like other retirement accounts, the 403 (b) can be used to fund short term loans if necessary.

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