The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 81. 403(b) Plans

MILLIONS OF AMERICANS who work for nonprofits and government agencies have a salary reduction plan at work that is similar to—yet different from—a 401(k) plan. These school teachers, college professors, doctors, nurses, and government employees are permitted to contribute to a 403(b) plan, authorized by a different section of the Internal Revenue Code.

Section 403(b) was added to the Internal Revenue Code in 1958, a full twenty years before section 401(k), to permit employees at nonprofits and government agencies to set aside pre-tax money in an annuity contract offered by an insurance company. Thanks to its roots in the insurance industry, the 403(b) plan is often referred to as a TDA or "tax-deferred annuity."

In 1974, Congress added paragraph 7 to section 403(b). This newer provision permits employees to set up their retirement plans with mutual fund companies instead of insurance companies. Today participants in 403(b) plans can choose between annuities and mutual funds, but they cannot choose other options permitted in a 401(k) plan, such as guaranteed investment contracts (GICs) and individual stocks.

Participants in a 403(b) are permitted to contribute $16,500 for 2009 to their 403(b) account, just as they would with a 401(k) plan. Participants older than fifty are allowed to contribute $22,000. The 403(b) plan also has a catch-up provision that entitles participants to contribute extra money for five years. I spent a great deal of time trying to understand ...