403 B Retirement Annuity Program

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools or employees of certain tax-exempt organizations. Individual accounts in a 403(b) plan can be any of the following types.

•     An annuity contract, which is a contract provided through an insurance company.
•     A custodial account, which is an account invested in mutual funds.

There are three benefits to contributing to a 403(b) plan.

• The first benefit is that you don’t pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income. However, if your contributions are made to a Roth contribution program, this benefit doesn’t apply. Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free.
• The second benefit is that earnings and gains on amounts in your 403(b) account aren’t taxed until you withdraw them. Earnings and gains on amounts in a Roth contribution program aren’t taxed if your withdrawals are qualified distributions. Otherwise, they are taxed when you withdraw them.
• The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. See chapter 10, Retirement Savings Contributions Credit (Saver's Credit) on IRS website https://www.irs.gov/pub/irs-pdf/p571.pdf.

Excluded: If an amount is excluded from your income, it isn’t included in your total wages on your Form W-2. This means that you don’t report the excluded amount on your tax return.
Deducted: If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax.

Only your employer can make contributions to your 403(b) account by elective deferrals, these are contributions made under a salary reduction agreement. This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. Except for Roth contributions, you don’t pay income tax on these contributions until you withdraw them from the account. If your contributions are Roth contributions, you pay taxes on your contributions but any qualified distributions from your Roth account are tax free.

For more information about 403(b) plans visit http://www.irs.gov/pub/irs-pdf/p571.pdf.