A 403b plan, also known as a tax-sheltered annuity (TSA), is a tax-deferred retirement savings plan for certain employees of public schools, tax-exempt organizations, and non-profit organizations. The features of a 403b are very similar to a 401k as employees make contributions to the plans before income tax is paid, allowing the funds to grow tax-deferred until the money is withdrawn from the plan. Withdrawal is customarily at retirement, at which point the funds are taxed as ordinary income. There are penalties for early withdrawal.
Many employees of educational institutions and non-profit organizations receive some type of pension upon retirement but these are often not enough to live comfortably. A 403b plan can supplement that pension during retirement. There are three types of 403b accounts: an annuity contract, which is set up through an insurance company; a custodial account, which is invested in mutual funds; and a retirement income account, which is usually set up for church employees.
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