403(b) Plan Tax Considerations
403(b) plans offer employees of certain tax-exempt organizations many of the retirement investing and tax advantages that 401(k) plans provide to employees of for-profit organizations. These tax-sheltered retirement plans are available to employees of public educational and 501(c)(3) tax-exempt organizations, including colleges, universities, schools, hospitals, etc.

Tax deferral is a major benefit of participating in a 403(b) plan. You can help to reduce your income taxes in two ways. First, the money you contribute comes out of your salary before taxes – so the full amount is set aside and working for you. Many employers also match all or part of your contributions, helping your nest egg grow even faster.

Second, currently the interest is also tax deferred. You pay no taxes on the principal or interest until you begin receiving payments. Typically, you will not receive payments from your 403(b) plan until you retire, when you are more likely to be in a lower tax bracket.

If the need arises, you can withdraw funds from your 403(b) plan, but early withdrawal charges – and an additional 10% penalty tax – may apply. Another option might be to, essentially, "loan yourself" some of the money in your 403(b) annuity at a reasonable interest rate. Loans are subject to minimum and maximum amounts as well as repayment requirements. Keep in mind that contract loans may adversely affect contract values, and outstanding loan balances will be deducted from policy values upon surrender, annuitization, or death.

Annuitization happens when you convert part or all of the money in your 403(b) plan into a stream of regular income payments – typically when you retire. In addition to providing an income stream during your retirement, your 403(b) plan can offer an effective estate planning technique to speed the remaining values directly to your beneficiaries without going through probate. If you should die before annuitization or total surrender, the full annuity value, less any outstanding loan balances, will be paid as a death benefit to your designated beneficiary.

Note: The above information is not intended or written to be used as legal or tax advice. It was written solely to support the sale of annuity products. As a taxpayer, you cannot use it for the purposes of avoiding penalties that may be imposed under the tax laws. You should seek advice on legal or tax questions based on your particular circumstances from an independent attorney or tax advisor.

Print this page