What is a 403(b)?
Very simply, a 403(b) is a tax-deferred annuity plan, or a type of retirement program that allows you to set aside money for retirement during your working years on a pre-tax basis. Your contributions and earnings that accumulate over the years are not taxed until you make withdrawals after age 59 ½ or age 55 and retired. The contribution limit in 2021 for ages 50+ is $26,000/year, while younger than 50 is $19,500/year.
The 403(b) is a tool for deferring income today and paying taxes on it only when you choose to. While working, income is typically the highest it will be during your lifetime, so by choosing to defer the taxes until the future, you may be decreasing your overall tax liability.
Distributions from traditional employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.