Employers of schools, religious organizations, hospitals, governmental organizations, and other non-profit organizations may be offered retirement plans that are different than the traditional 401(k) plans that many people are familiar with. They still offer tax efficiency and can help employees save for retirement.
A 403(b) retirement plan, also known as a tax-sheltered annuity plan, is similar to a 401(k) plan. This plan allows employees of non-profit organizations to contribute their pre-taxed dollars into a tax-deferred investment account, which is the same design as a 401(k). There are typically investment options for mutual funds and annuities, allowing a diversified way to save for retirement. In certain situations, there may be an option to contribute more than the traditional contribution, which may be advantageous. Another benefit is that employees may earn their right or ownership to their funds invested in the plan in a shorter time frame than a 401(k) plan.
This plan is commonly offered to state and government employees, which allows them to defer their compensation to save for retirement. An employee can contribute their pre-tax dollars to their plan thereby reducing their taxable income. This plan is also advantageous because any interest or growth in assets is not taxed until funds are withdrawn. In some situations, there is a double catch-up provision to allow employees to contribute even more money before they retire.