A 403(b) plan is a voluntary deferred compensation plan. It’s similar to a 401(k) plan, which is common in the private sector. A 403(b) plan is a retirement plan for certain employees of public schools and certain tax-exempt organizations, such as community colleges. A 403(b) plan is also known as a tax-sheltered annuity (TSA) plan. It gets its name from the particular section of the Internal Revenue Code: Section 403(b).
A 403(b) plan is different and separate from your pension plan. Your pension plan is a constitutionally guaranteed retirement plan through the Michigan Public School Employees Retirement System and is separate from a 403(b) plan.
Why a 403(b) plan is a good investment.
Before meeting with investment providers, you need to consider your retirement needs and your anticipated retirement income. Project your retirement expenses and gather information about your projected benefits. The better prepared you are, the more productive your meetings will be!
The three most common sources of retirement income are social security, a pension, and a supplemental investment plan. For Michigan teachers and school staff, that’s a 403(b). To know the potential retirement income from each, contact the Social Security Administration (for your Social Security benefit) and the Michigan Office of Retirement Services (for your pension benefit).
You don’t 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 are either excluded or deducted from your income. As a quick example, if you earned 50,000, but contributed $5,000 to a 403(b) plan, you would pay income tax on $45,000.
You don’t pay tax on your earnings and gains until you withdraw them.
The dollars you contribute to your 403(b) account grow tax-free, which means they have greater potential for appreciation.
You may be eligible to take a tax credit for elective deferrals contributed to your 403(b) account.
The dollars you contribute grow tax-free, which means they have the potential for appreciation.