The ABCs of 403(b) Savings Plans

Written by: Mark Cussen

Millions of Americans elect to defer a portion of their annual incomes into an employer-sponsored qualified plan that grows on a tax-deferred basis.  Those who work in the private sector usually contribute to 401(k) or profit-sharing plans.  Employees of nonprofit organizations are required to use a different type of plan, known as a 403(b) plan to save for their retirements.

403(b) savings plans are widely used by all types of 501(c)3 employers, including schools, hospitals, churches and other similar entities.  These plans now resemble their 401(k) cousins in most respects; the contribution limits, rules for taxation and distributions are virtually identical to other qualified plans.  Contributions into these plans are made on a pretax basis and grow tax-deferred until retirement, with the standard 10% penalty applying to all withdrawals taken before age 59 ½ that do not qualify under one of the listed exceptions such as death or disability.

For 2011 and 2012, plan participants can contribute up to the lesser of 100% of their earned income or $16,500 per year, with an additional “catch-up” contribution of $5,500 per year allowed for employees age 50 and over.  Employers also now have the same matching options in these plans as for other plans; they can contribute up to an additional $32,500 per employee through 2012 for a total joint contribution for the year of $49,000.  403(b) savings plans do have one unique feature in that those employees who meet the conditions of a special 15-year rule may also be eligible for additional annual contributions of up to $3,000 per year for a 5-year period.

These plans again resemble their qualified cousins in that a Roth feature may now be added that allows participants to make after-tax contributions to their plans and withdraw the money tax-free at retirement.  However, any early withdrawals from Roth 403(b) savings plans are taxable as ordinary income in addition to being subject to the early withdrawal penalty.  Automatic enrollment into the plan may also be added at the employer’s discretion.  Mandatory minimum distributions must be taken from both Roth and traditional 403(b) savings plans at age 70 ½ unless the employee is still working or has rolled the plan into a Roth IRA.  These plans may now also be rolled into a 401(k) or other retirement plan in many cases, allowing an employee who leaves the nonprofit sector to move the plan into the plan offered by the new employer in the private sector.  For more information on 403(b) plans, download Publications 571 and 575 on the IRS website at or consult your financial advisor.


The ABCs of 403(b) Savings Plans

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