In the retirement-savings arena, many people have a basic understanding of IRAs and 401(k) plans, while few are familiar with 403(b) plans. You may be offered only a 403(b) plan at your workplace, and not a 401(k), so let's review the answers to seven frequently asked 403(b) questions.
In a nutshell, 403(b) plans are much like 401(k) plans -- but a little different. They're offered chiefly to those working at schools as well as some other tax-exempt enterprises, including churches. As with a traditional 401(k) plan, you can contribute part of your income to your account on a pre-tax basis, where it can grow tax-deferred until you reach retirement age. For example, if you earn $70,000 this year but contribute $10,000 to your 403(b) account, your taxable earnings shrink by that $10,000. (So, if you're in the 25% tax bracket, you can avoid paying $2,500 on those earnings in the current year.) When you withdraw money from the account in retirement, it will be taxed as ordinary income -- which can deliver an extra benefit if, like many people, you're in a lower tax bracket in retirement.