A look at the 403b Retirement Plan in the USA

A bit of a change in tack, but what retirement plans does the UK have in comparison to the USA? Would Cheshire public sector workers benefit from one like a 403b? So what exactly is one? Let’s find out Cheshire…

403b retirement plan

A 403(b)-plan is a type-of tax sheltered annuity. Like most other retirement plans, earnings and contributions in a 403(b) retirement plan account are tax deferred til retirement. Unlike many other plans, however, 403b-accounts are offered by non-profit organizations only.

A 403-b plan is basically a retirement savings-account offered by non profit companies, mainly public schools to the employees. This plans typically don’t allow distribution before the retirement period, but you’re permitted to take out a loan against value of the plan for whatever reason. The loans don’t involve any credit checks and aren’t reported on any of your taxes as taxable-income, but you have to repay them with some interest.

A 403b retirement plan can also be described as a U.S-tax advantaged retirement plan that’s available for public schools, certain non profit organizations (only the Internal Revenue-Code 501(c)-(3) organizations), cooperative-hospital service-organizations, & self employed ministers in US. Employees salary-deferrals into a 403b retirement plan are usually made before the income tax is deducted or paid and its allowed to build up (tax deferred) til the amount is later taxed as income after being withdrawn from the retirement plan. A 403b-plan is also referred-to as a tax sheltered-annuity although since the year 1974 they are no longer really restricted to annuity forms and the participants or employees can now also invest-in mutual funds.

Employees or participants typically sign-up for 403(b) plans directly through the employer. Contributions and earnings are then made through pay-roll deductions, and many employers do provide a matching-contribution up to a certain capped amount. Contributions and earnings are pre tax. When the employees get to the retirement age, his or her withdrawals from the 403b-account will then be taxed. Unlike the 401k plans or the IRAs, only the employees of the participating non profit organization can open a 403(b) account (that is, public schools and public universities and organization that are classified as 501c-3 organizations, according to the United States tax code). Typically, the 501c-3 status is usually reserved for the charitable organizations, like the Habitat for Humanity, although some non profit organizations outside the charity-arena can also maintain the 501c-3 status.

Both the employers and the employees reap benefits from the 403b plans. Employees are able to save for their retirement with the tax-deferred contributions and since most of these people make a significantly less income during-retirement, they’re in a lower-tax bracket and the eventual tax they pay on their contributions will most likely be much lower. The employers benefit from the 403b-plans because they’re attractive to high quality employees who prefer an employer sponsored way of saving for their retirement. Also, the 403(b) retirement plans cost the employers much less than the older pension-plans since costs of funding the 403(b)-plans are shared or spread between the employee and the employer.

There are 3 types of 403(b)-plans: an annuity contract, custodial account and retirement income-account. Annuity contract plans are made with insurance companies and are the most popular or common type of 403(b)-plans. Custodial accounts are typically established or created for the beneficiary rather-than the owner or bearer of that account. Retirement income accounts are reserved for mainly churches and other specially-designated non-profits. A 403 b retirement plan lets you put a given portion of your monthly salary into the employer sponsored plan thus helping you save for your retirement, and since some employers also match the contribution, you will be getting free money just for participating in the retirement plan.

The key difference between 403b plans and the common 401k plans is that it’s the employer who sponsors the plan. Profit-employers usually offer 401k-plans while the non profit employers offer 403b plans. In some instances, the 403(b) plans aren’t subject to exactly the same legal-requirements as the 401k plans, but the requirements don’t really change the overall-function of both accounts. On the other hand, pension plans and tax sheltered annuity plans both qualify as retirement plans. The tax sheltered annuities basically fall under section 403 (b) of the IRS code (That is, The Internal Revenue Service-code) thus they are known as 403(b) retirement plans. Pension plans are basically, defined benefit-plans. An employee in a pension plan will receive a specific pay-out when they reach retirement. The organization or company/employer providing that pension will make the payments into the employees pension account. The pension amount of these monthly payments usually vary depending on various factors, including the investment performance. Tax sheltered annuity plans are basically defined contribution-plans. The amounts placed into the retirement plan are established-by the participant or employee; the participant makes these contributions to the retirement plan through monthly payroll deductions.

So what do you think? I believe Cheshire and the UK have enough options, but it is interesting that Cheshire’s public sector could have dedicated tax and retirement plans. Thanks for reading!

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