Resources:
Why YOU Should Care:
If you work for a public school, a tax-exempt organization, or are a minister, you may qualify to save for retirement under a 403(b) tax-sheltered annuity plan.
What is it?
A 403(b) plan is a retirement savings vehicle for public school teachers, ministers, and those working for tax-exempt organizations. The plan itself can consist of annuity contracts provided by insurance companies or mutual funds managed by a custodian. These plans can only be set up by employers for qualifying employees.
As a tax-sheltered savings plan, you will not pay income tax on contributions to the plan. In the year of contribution, these amounts are excluded (by your employer) or deducted (by you) from income. Gains are taxed instead in the year of distribution.
Note: Contributions made to a Roth programs operate in the opposite manner in that they are taxed in the year earned and tax-free in the year distributed.
Who qualifies?
IRS Publication 571 defines qualifying employees as:
- Employees of tax-exempt organizations established under internal revenue code section 501(c)(3),
- Employees of public school systems who are involved in the day-to-day operations of the school (e.g., teachers, administrators) and employees of public school systems organized by Native American Tribal Governments,
- Employees of cooperative hospital service organizations,
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences,
- Ministers who are:
- Employed by 501(c)(3) organizations, or
- Self-employed, and
- Chaplains who work for organizations that do not qualify as 501(c)(3) organizations but who act as ministers in their everyday professional activities (e.g., military chaplains).
While these employees qualify, they are unable to set up 403(b) plans for themselves. Rather, their employer can set up a plan for their benefit. Self-employed ministers, for example, are qualified for a plan established by their denomination.
