A 403(b) is a retirement plan available to employees of educational institutions, churches and many other tax-exempt organizations. These plans are sometimes known as tax-sheltered annuities (TSA) or tax-deferred annuities (TDA). Not all 403(b)s are annuities, though. One type of 403(b) plan, known as a 403(b)(7), allows employees to invest in mutual funds.

As opposed to a pension plan funded by your employer, with a 403(b) plan you are primarily responsible for building up your retirement account through your salary deferrals and investment choices.

The government offers a tax break as an incentive for you to participate in a 403(b). Your contributions to a 403(b) are made by deferring some of your salary to it before paying tax. What's more, the gain on your 403(b) investments is not taxed as you earn it. Rather, you pay tax on your contributions and earnings when you withdraw the money. This lets you benefit from tax-deferred compounding, which helps your money grow faster over time.

Your employer may make contributions to your 403(b), but is not required to do so.

Any employer that is tax-exempt under IRS Code Section 501(c)3 is eligible to set up a 403(b) retirement plan. This includes nonprofit organizations such as churches, charities, scientific associations, literary associations, private foundations, educational associations, safety-testing organizations, public schools, state and local hospitals, and colleges and universities.

In general, two types of investments are allowed in 403(b) plans: annuity contracts and mutual fund custodial accounts.

An annuity contract can be an individual or group contract that provides fixed retirement benefits to the plan participant, and possibly for a surviving spouse. Variable annuities may also be offered.

A mutual fund custodial account is an alternative to an annuity contract, but works much the same way. Typically, you can invest your money in any of a family of mutual funds provided by the mutual fund company, usually giving a range of investment choices. The contract is between the employee and the mutual fund company, and each employee has his or her own account. The account custodian is an institution such as a bank, insured federal credit union, or mutual fund company.

Some life insurance contracts may be treated like an annuity contract for 403(b) purposes, permitting salary deferrals and employer contributions. These are known as retirement endowment contracts. The amount you pay for the life insurance portion is not tax deferred.

If you are an employee of a church or association of churches, you may be eligible for a retirement income account (a special type of 403(b) program). These accounts allow for a wider range of investments. In addition to those listed above, you may generally invest in stocks, bonds or even bank products.

Generally, all employees of tax-exempt organizations and public schools can contribute to 403(b) plans. Independent contractors can't. Depending on whether your employer will also make contributions, additional restrictions may apply.

403(b) programs were originally created in 1958 by Congress for employees of tax-exempt corporations.

In 1961, public education institutions, including public school districts, became eligible to offer 403(b) plans.

In 1973, Congress passed a law allowing employees to make tax-free exchanges of the full account value from one 403(b) plan to another, and partial transfers have been allowed since 1992.

In 1974, Congress passed the Employee Retirement Income Security Act (ERISA), which included a provision allowing 403(b) plans to increase the number of their investment options and offer mutual funds in addition to annuities.

In 1978, a law was passed allowing employees to roll 403(b) assets into a traditional IRA.

Starting in 1982, with the passage of the Tax Equity and Fiscal Responsibility Act, 403(b) plans were allowed to permit participants to take loans. Additionally, religious organizations were permitted to set up retirement income accounts.

In 1986, another tax law imposed restrictions on withdrawals before age 59 1/2 and made them subject to a 10 percent early withdrawal penalty. Additionally, required minimum distributions (after age 70 1/2) were established along with new limits on elective deferrals. The limit established then, $9,500 per person per year, remained in effect until 1998.

A 1992 IRS ruling allowed employees to make tax-free full or partial account transfers from 403(b) annuities to 403(b)(7) mutual fund accounts.

The 2001 tax bill, which took effect in 2002, allowed 403(b) participants to roll their money into a 401(k) or governmental 457 plan when changing jobs, in addition to an IRA or other 403(b). Similarly, employees with savings in 401(k) or governmental 457 plans may roll their contributions into a 403(b) plan, if offered by their new employer. The tax bill also simplified the formula used to calculate an employee's annual contribution limit.

A 403(b) plan is a tax-deferred retirement savings program. Unlike a pension plan, which is completely funded by the employer, a 403(b) plan is funded primarily or completely by you, the employee. The government gives you tax breaks to make this process less painful.

The first tax break is that your contributions up to your plan's limits are tax-deductible. 403(b) plan contributions are made from your paycheck before taxes are collected, meaning your taxable income is actually lowered when you contribute to the plan. For 2003, the maximum pretax contribution allowed is $12,000. (The limit in 2002 was $11,000.)

Additionally, the earnings your contributions generate grow tax-deferred, which can help your money grow faster over time. Your employer may make contributions to your 403(b), but is not required to do so.

Unfortunately, both tax breaks end when you begin to withdraw your balance. You then have to pay applicable federal, state and local taxes on your original contributions and the earnings on them. But, your income in retirement may be lower than during your working years so the tax bite may not be as severe.

With a 403(b), your final retirement balance depends on how much you (and your employer, if applicable) contribute, and how you invest the money.

It may be possible to withdraw your money before retirement in certain circumstances. You should check with your 403(b) provider for details about taking a loan or hardship withdrawal. With a hardship withdrawal, you would owe taxes and possibly a 10 percent early withdrawal penalty.

There are two types of 403(b) plans -- those that are governed by the Employee Retirement Income Security Act of 1974 (ERISA) and those that aren't (known as voluntary plans). Any plan that offers an employer contribution must be ERISA-compliant (although not all ERISA-compliant plans offer a match). Voluntary plans only allow employee contributions. Hospitals and non-profit organizations tend to offer ERISA-compliant plans, while public school districts tend to offer voluntary plans.

Both are tax-deferred defined-contribution retirement plans in which participants are responsible for selecting how to invest their contributions. Many of the annual contribution limits are the same.

The withdrawal rules are similar, with penalty-free withdrawals generally allowed any time after you reach age 59 1/2. You must begin taking withdrawals by the time you reach age 70 1/2. Some of the rules for hardship withdrawals are more restrictive for 403(b) plans than 401(k) plans.

One key difference between the two plans is that the employee contributions in 403(b) plans are not subject to limits due to nondiscrimination testing, although employer contributions are. With a 401(k) plan, employee and employer contributions together are tested, and may be limited for highly compensated employees (HCEs). The IRS considers you an HCE in 2003 if you earned over $90,000 in 2002.

Additionally, the investment options for 403(b) plans are limited to annuity contracts and mutual funds, while 401(k) plans may offer additional types of investments.

A 403(b) plan can help improve your chances of meeting your financial goals for retirement. Here are two good reasons to participate in a 403(b):

1. It can make your retirement more comfortable. Many folks expect a pension and/or Social Security in retirement. But pensions often pay a fixed benefit and Social Security isn't enough for most folks to live on. Savings in a 403(b) plan can help augment these two programs.
2. Saving in a 403(b) plan is a disciplined way to build a retirement nest egg. The money you save accumulates on a tax-deferred basis, allowing you to avoid paying federal or state taxes on your contributions or investment earnings until you start withdrawing money from the plan. This lets your dollars accumulate more quickly.

Yes, but depending on your salary, your IRA contribution may not be tax deductible.

For 2003, if you participate in an employer-sponsored retirement plan such as a 403(b), you can deduct the entire maximum $3,000 annual IRA contribution only if you are:

• Single and earn no more than $40,000, or
• Married, filing jointly and together earn no more than $60,000.

You may be eligible for a partial deduction if your total income is between:

• $40,000 and $50,000 for single filers, or
• $60,000 and $70,000 for married, filing jointly.

If you are single and earn $50,000 or more, or are married, filing jointly and earn $70,000 or more, you can still contribute to an IRA, but you can't deduct your contribution. On the other hand, money you contribute to an IRA still enjoys the benefit of tax-deferred growth until you withdraw it at retirement.

Roth IRA: Another option is a Roth IRA. Contributions to a Roth IRA are not tax deductible, but you don't have to pay taxes on any gain your investment earns -- even when you withdraw money at retirement -- as long as you fulfill certain requirements.

If your taxable income is no more than $95,000 (single) or $150,000 (married, filing jointly), you can contribute a maximum of $3,000 in 2003 to a Roth IRA, even if you also participate in a 403(b) plan. If you are age 50 or older you can contribute an additional $500 as a catch-up contribution.

If you earn more than the $95,000/$150,000 ceiling, your maximum allowable contribution will be less than $3,000 (gradually phased downward).

If you earn $110,000 or more (single) or $160,000 or more (married, filing jointly), or if your tax filing status is "married, filing separately" and your income is $10,000 or more, you are not eligible to contribute to a Roth IRA.

This depends on the rules of your particular plan. There is no federally imposed minimum contribution to a 403(b), but some plans may require participants to contribute a minimum dollar amount per year (usually $200) to offset any administrative costs.

You may roll over your 403(b) money into a new employer's 403(b), 401(k), or governmental 457(b) plan if the new employer's plan accepts rollovers. You may also roll it over into an IRA.

Doing a rollover is generally a good idea because it lets you maintain the account's tax-deferred status and avoid paying taxes on the money until you withdraw it, hopefully in retirement.

If your new company doesn't allow rollovers, you have two other options that would allow you to maintain the account's tax-deferred status.

1. If your vested account balance is $5,000 or more and you're under age 65, you can leave your money in your old employer's 403(b) plan -- and taxes won't be due until you withdraw money.
2. You can roll over your 403(b) into a traditional IRA. If you do a direct rollover -- have the money transferred directly into the new IRA -- you won't owe taxes until you withdraw money from the IRA.

If your balance is less than $5,000 and more than $1,000, your employer may decide to automatically roll it into an IRA account on your behalf. If this occurs, there are no tax consequences because the money is moving from one tax-deferred account to another. If your balance is $1,000 or less, it may be automatically distributed to you in a lump sum and you will owe applicable taxes and penalties.