403(b) retirement plans are a common type of retirement plan offered to individuals that work in nonprofit organizations, including: public schools, religious organizations, certain tax-exempt organizations, and can also apply to certain ministers.
Similar to 401(k) plans, the most commonly used retirement plan on the market, 403(b) plans are reserved exclusively for not-for-profit organizations. If you’re wondering if your organization and employees qualify for a 403(b) retirement plan, keep reading or contact Leading Retirement Solutions to find out what’s the best retirement plan option for your organization.
Eligible employees of 403(b) Plans include:
- Employees of tax-exempt organizations established under section 501(c)(3). These organizations are usually referred to as Section 501(c)(3) Organizations or simply 501(c)(3) Organizations.
- Employees of public school systems involved in the day-to-day operations of a school.
- Employees of cooperative hospital service organizations.
- Civilian faculty and staff of the Uniformed Services University of the Health Sciences.
- Employees of public school systems organized by Indian tribal governments.
Eligible ministers for 403(b) Plans include:
- Ministers employed by Section 501(c)(3) organizations.
- Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer.
- Ministers (chaplains) who meet both of the following requirements:
- They are employed by organizations that are not section 501(c)(3) organizations.
- They function as ministers in their day-to-day professional responsibilities with their employers
See 5 great tax breaks for organizations with a retirement plan
What’s so special about 403(b) plans? Why wouldn’t these organizations just use 401(k) plans if they’re basically the same thing? Well, 403(b) plans are exclusive to nonprofits because they come with some added perks.
The perks of the 403(b) Plan:
As with any retirement plan the best perk, of course, is the ability to build wealth over time and ultimately enjoy a quality retirement. Here is how the 403(b) Plan helps you do just that.
1) 403(b) plans do not require you to pay income tax on allowable contributions, which fall into two categories: Excluded or Deducted.
- Excluded Contribution: 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, effectively paying less in taxes.
- Deducted Contribution: 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 can subtract it when determining the amount of income on which you must pay tax.
2) Earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them, which is usually after you retire. Meaning, your investments will grow tax free and only when you retire and begin withdrawing money from your 403(b) account, will you have to pay taxes. Your money will grow faster this way as your initial investment is larger due to not paying taxes on it.
3) You may also be eligible to claim a tax credit for elective deferrals contributed to your 403(b) account. The Retirement Savings Contribution Credit, also known as the Saver’s Credit, was created to assist low to moderate income taxpayers to save for retirement. Basically, if you qualify it’s free money that goes toward your retirement.
There are also three options in which 403(b) plans can operate and depending on your organization's overall strategy.
3 plan options for the 403(b) retirement plan:
- Annuity Contract: which is a contract provided through an insurance company
- Custodial Account: which offers mutual funds, exchange traded funds, stocks, and bonds
- Retirement Income Account: which is set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds.
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