403(b) Retirement Plan
What is a 403(b) Plan?
A 403(b) account is a qualified retirement savings account similar to a 401k or an IRA. Employees of public schools, certain tax exempt organizations, and certain ministers can contribute to a 403(b) plan set up by their employers. The individual accounts for 403(b) plans can be any of the following types:
- An annuity contract with an insurance company (either variable or fixed)
- A custodial account, which invests in mutual funds, or
- A retirement income account for church employees, which can invest in both.
How are my contributions treated on my taxes?
Just like an IRA, a 403(b) can have either a traditional or Roth contributions. Any contributions you make to your 403(b) usually come from an elective deferral, where your employer will withhold a certain amount from your paycheck - an amount that you have set up - and contribute it to your account. Additionally, your employer sometimes will contribute to your account. Some 403(b) plans also allow for after-tax contributions.
Each of these contributions have different tax ramifications:
- Traditional contributions are made on a pre-tax basis
- The contribution is removed from your paycheck before any tax is withheld
- You generally do not need to report your contributions on your tax return
- You will pay taxes on this deferred income when you withdraw from your account
- Roth contributions are made on an after-tax basis
- The contribution is removed from your paycheck after withholding tax
- Qualified withdrawals are tax free
- Since these contributions are made after-tax, they are reported on your W-2 as income
- After-tax contributions are taxed and reported like normal income
I am a self-employed minister or a chaplain
If you are a self-employed minister, you must report the total contributions as a deduction on your tax return. Deduct your contributions on line 28 of the 2012 Form 1040.
If you are a chaplain and your employer does not exclude contributions made to your 403(b) account from your earned income, you may be able to take a deduction for those contributions on your tax return. However, if your employer has agreed to exclude the contributions from your earned income, you will not be allowed a deduction on your tax return. If you can take a deduction, include your contributions on line 36 of the 2012 Form 1040.