In general, yes. Also known as a tax-sheltered annuity, a 403(b) plan is an employer-sponsored plan designed for employees of certain tax-exempt organizations (e.g., hospitals, churches, charities, and public schools) to invest for their retirement. Typically, the employer purchases annuity contracts or sets up custodial accounts for eligible employees who choose to participate. A 403(b) plan is technically not a qualified plan, but it is said to mimic a qualified plan because it shares some of the same features.
Like a 401(k) plan, a 403(b) plan enables one to make contributions to the plan on a pretax basis. These are known as salary-reduction contributions because they come from salary before taxes are withheld, thus reducing current taxable income. For tax year 2018, an investor is allowed to defer up to $18,500 a year or 100 percent of compensation, whichever is less, to the plan. If age 50 or older, an investor can make an extra "catch-up" contribution of $6,000 in 2018 (additional special catch-up contribution rules may also apply). Employers will sometimes contribute to the plan as well, although employer contributions are generally not required and (if made) must vest before an employee is entitled to them. Earnings (e.g., dividends and interest) on 403(b) plan investments accrue tax deferred. Only when funds are withdrawn from the plan will income tax be paid on contributions and earnings. If an investor waits until after they're retired to begin withdrawing, they'll probably be taxed at a lower rate.
The combination of pretax contributions and tax-deferred accumulation creates the opportunity to build an impressive retirement fund with a 403(b) plan, depending on investment performance. An investor may even qualify for a partial tax credit for amounts contributed if their income is below a certain level. In addition, a 403(b) plan may allow an employee (under certain conditions) to withdraw money from the plan while still working for their employer. Beware of these "in-service" withdrawals, however. They may be subject to both regular income tax and (if the employee is under age 59½) a 10 percent early withdrawal penalty. A plan loan, if permitted, might be a better way to obtain needed cash.
Although some 403(b) plans have a limited number of investment choices, many of these plans have been offering a broader range of investments in recent years, including many well-known mutual funds.
Note: An employer may also allow after-tax "Roth" contributions to a 403(b) plan. Because Roth contributions are after tax, those contributions are always tax free when distributed. But the main attraction of Roth 403(b) contributions is that the earnings on contributions are also tax free if a distribution is "qualified." In general, a distribution is qualified if it is made more than five years after the year an investor makes their first Roth 403(b) contribution, and is either 59½ or disabled when they receive the payment.
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GE 126782 (02/2018)