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Taxmap/pubs/p571-001.htm#TXMP552da788 Chapter 1 403(b) Plan Basics

403(b) Plan Basics

This chapter introduces you to 403(b) plans and accounts. Specifically, the chapter answers the following questions.

• What is a 403(b) plan?
• Who can participate in a 403(b) plan?
• Who can set up a 403(b) account?
• How can contributions be made to my 403(b) account?
• Do I report contributions on my tax return?
• How much can be contributed to my 403(b) account?

Taxmap/pubs/p571-001.htm#TXMP673913bf What is a 403(b) Plan?

403(b) Plan

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.

Individual accounts in a 403(b) plan can be any of the following types.

• An annuity contract, which is a contract provided through an insurance company,
• A custodial account, which is an account invested in mutual funds, or
• A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.

Throughout this publication, wherever the term "403(b) account" is used, it refers to any one of these funding arrangements, unless otherwise specified.

Taxmap/pubs/p571-001.htm#TXMP549daa20

Taxmap/pubs/p571-001.htm#TXMP66f2d12c What are the Benefits of   Contributing to a 403(b) Plan?

403(b) Plan, Contribution

 
There are three benefits to contributing to a 403(b) plan.

• The first benefit is that you do not pay tax on allowable contributions in the year they are made. You do not pay tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income.
• The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them.
• The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. See chapter 10.

Taxmap/pubs/p571-001.htm#TXMP36150308 Excluded.

If an amount is excluded from your income, it is not included in your total wages on your Form W-2. This means that you do not report the excluded amount on your tax return.

Taxmap/pubs/p571-001.htm#TXMP67e89421 Deducted.

If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax.

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