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Learn About 403(b) Tax Deferred Annuities (TDAs)
If you are employed by certain qualified types of employers, you have the opportunity to use a 403(b) tax deferred annuity as an addition to your retirement savings plan.
A 403(b) is an employer-sponsored plan, so you can’t open a 403(b) account on your own, as you can with an IRA. Only public schools and tax-exempt employers that qualify under Internal Revenue Code Section 501(c)(3) are eligible to offer these types of plans. This includes educational organizations such as school districts or higher education institutions, as well as churches, tax-exempt hospitals, and charities.
When it comes to saving for retirement, an employer-sponsored retirement plan offers many advantages:
- Generally, you pay no federal income taxes on the money you put into the plan until it is time to take withdrawals.
- You pay no federal income taxes on any interest or earnings until you take withdrawals.
- Your employer may match a percentage of the amount you contribute to the plan, increasing the value of your account.
- You have the advantage of investing in professionally managed subaccounts available to your particular plan.
- Participating in an employer-sponsored plan is a convenient way to save toward retirement.
- Certain 403(b) plans may permit you to make Roth 403(b) contributions on an after-tax basis and, under certain circumstances, the earnings from the Roth 403(b) may be distributed free from federal income taxes.
A qualified distribution of Roth 403(b) amounts is excludable from gross income. A qualified distribution is one that occurs at least 5 years after the year of the participant’s first Roth 403(b) contribution (counting such first year as part of the 5) and is made:
- On or after the participant’s attainment of age 59½,
- On account of the participant’s disability, or
- On or after the participant’s death.
If the distribution is not a qualified distribution, then the accumulated Roth 403(b) earnings will be subject to tax, and additional taxes may apply. Roth 403(b) amounts are subject to the same required minimum distribution rules as other contributions made to the 403(b) plan.
A 403(b) plan is a type of defined contribution plan. It is also referred to as an individual account plan. Unlike other types of pension plans that guarantee a certain income at retirement, your income from a defined contribution plan will be based on the value of the account when you retire. Withdrawals are subject to Internal Revenue Code 403(b) requirements and any applicable tax penalties.
How much can I contribute?
Employees can contribute pre-tax salary (and/or after-tax salary if the plan permits Roth 403(b) contributions) to the plan and, if the plan permits, the employer may match part, all, or none of that amount. Employees may contribute up to $16,500 in 2009 (adjusted annually for cost of living). If employees have at least 15 years of service with certain employers or are at least 50 years, they may be able to contribute more of their income under one or more of the special catch-up provisions.
C09-0122-014
000902
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