A 403(b) plan is a retirement savings plan that may be offered by non-profit, tax-exempt employers, including schools and colleges, hospitals, museums, and foundations. If you work for this type of employer, and you’re offered a plan that’s called a tax-sheltered annuity (TSA) or tax-deferred annuity (TDA), it’s actually a 403(b).
Like 401(k) plans, a 403(b) may be available as a traditional tax-deferred plan or you may have a choice between the traditional plan and a Roth 403(b). With the traditional 403(b), you contribute pretax income and postpone income tax on your contributions and on any earnings that accumulate in your account. Eventually, taxes are due at your regular rate on the amounts you withdraw.
With a Roth 403(b), you contribute after-tax income but all withdrawals after you turn 59 1/2 are completely free of federal income tax, provided your account has been open at least five years. Some employers may allow you to split your contribution between a traditional and Roth 403(b). However, you can’t move money back and forth between the two types.
403(b)s and 401(k)s
Though they’re different in some ways, 403(b)s have a great deal in common with 401(k)s:
The annual contribution limit is the same
You can select among the investment choices the plans offer, though those available in a 403(b) are limited to annuities and mutual funds
The plans are portable, which means you can move your assets to a new employer’s 401(k), 403(b), or 457 plan or rollover them over to an IRA
If you withdraw before you turn 59 1/2, you may owe a 10% tax penalty plus the income tax that’s due
You must begin taking minimum required distributions when you turn 70 1/2 unless you continue to work
