403(b) Basics

What is a 403(b)?

A 403(b) plan is a tax-deferred retirement plan available to employees of certain educational institutions and certain non-profit organizations. Contributions and investment earnings in a 403(b) grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. A 403(b) plan is named after the section of the IRS code governing it.

How a 403(b) works

Employees enroll and participate through their employer. Contributions to a 403(b) are made on a pre-tax basis through an agreement where the participating employee agrees to take a reduction in salary. The amount by which the salary is reduced is directed to investments offered through their investment provider. These contributions are called elective deferrals and are excluded from the employee’s taxable income.

Roth 403(b)

This is a provision that permits employees to designate all or a portion of their 403(b) contribution as an after-tax Roth contribution. This type of contribution does not provide a tax benefit up front, and therefore does not reduce your taxable income. However, a qualified distribution from the account will not be subject to income tax. If your employer allows for Roth 403(b) contributions, you may contribute pre-tax and/or Roth contributions, not to exceed the IRS limit. See “Contribution Limits” for the current IRS contribution limit.

How is a 403(b) different from a pension?

Pensions, like MPSERS in Michigan, are formula based. MPSERS uses a unit benefit formula (e.g. years of service x multiplier (1.25% or 1.5%) x final average compensation. If you are eligible for a pension, a percentage of your income is contributed toward this per paycheck. When eligible for your pension you will receive a monthly benefit based upon the applicable formula. All investment decisions for these pensions are made by plan officials. In contrast, the 403(b) is a voluntary, self-directed plan in which the value of your account is based on your contributions and investment earnings over time. The value at retirement will dictate the amount of income you can expect to receive.

Changing 403(b) Providers

To consolidate an old employer plan or change from your current 403(b) provider to Midwest Capital Advisors, please contact us for more information.

For more information:

If you wish to read more on 403(b) accounts or 457(b) accounts, please visit 403bwise.com.