A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees’ accounts.

A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It’s similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it’s distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently, but is tax-free (including earnings) when distributed.

Eligible employers are a:

• public school, college, or university,
• church; or
• charitable entity tax-exempt under Section 501(c)(3) of the Internal Revenue Code

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Pros and Cons:

Flexibility in contributions

Investment options are limited to those chosen by the employer

may have high administrative costs

optional loans and hardship distributions add flexibility for employees

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Who contributes

Employee salary deferrals; employer may contribute.

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Contribution limits

Total contributions to each employee’s 403(b) account or annuity are limited.

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Filing requirements

Certain 403(b) plans may be subject to annual Form 5500 filing requirements.

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Participant loans

Permitted if the terms of the plan allow loans.

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In-service withdrawals

Yes, but subject to possible 10% penalty if under age 59-1/2.