The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations. The name, like the better kown 401(k) plan, comes from the section of the Internal Revenue Code that governs these plans. The 401(k) is a retirement plan for private sector workers. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.
Participants may contribute up to $18,000 for year 2016. In 2015 the limit was also $18,000. For those with employer matches or other employer contributions, the limit is $53,000 or 100% of compensation (whichever is less). The participant is still limited to the employee elective deferral limit ($18,000 for 2016). An employer can add up to another $35,000. Participants age 50 and older at any time during the calendar year are permitted to contribute an additional $6,000 in 2016.
If you withdraw assets prior to age 59½, the IRS will impose a 10 percent penalty tax on the amount to be included in your taxable income in addition to the normal tax consequences, unless you meet one of several exceptions. You must begin to take withdrawals from your 403(b) no later than April 1 of the year following the year in which you turn age 70½. If you are still working, you can delay withdrawal from your 403(b) until April 1 following the year in which you retire.
If your employer offers a 403(b), it is a good practice to comtribute at least enough to get the full matching amount that may be offere.
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