403b Retirement Plans

There are different retirement plans for Americans who don't run their own business but, as in most cases, are employed by a company. These plans have all the same basic mechanism, whereby an employee puts money from his wages or salary into a specific account while he works. Once he reaches retirement age he can withdraw what he has accumulated over the years in the form of a pension.

The most common plan is a 401(k) plan. With this plan it is not only the employee who deposits, via a deduction from his payroll, to his 401(k) account, but in many cases the employer matches either all or part of the employees' contribution. It is an additional incentive for the employee to stay with a particular company, and the company avoids thus a large turnover of staff and training costs. The company might even offer to match the employee's contribution to his 401(k) plan with a profit-sharing scheme.

A 403b savings plan has the same fundamental characteristics as the 401(k) plan, but is specifically designed for people who work in civil government, Universities, and non-profit organizations. They include as well self-employed religious ministers, most employees of public schools and generally employees of organizations that are tax-exempt. Many times a 403(b) plan is compared to the 401(k) plan, but there are some fundamental differences between the two. The employee of a corporation with a 401(k) plan can decide how the money he is saving is to be invested in order to yield more over time. He can choose between a variety of instruments, such as bonds and stocks. In practice he will invest his savings in a mutual fund that is managed by a brokerage firm.

The choices are more limited for people who have a 403(k) plan. To begin with, they cannot use those savings to buy individual stocks, as the holder of a 401(k) can. They have to buy an annuity (which might be variable) with an insurance company, open a custodial account made up of mutual funds (403(b)(7), or they have to save their money with a retirement income account for churches. The benefits of both plans, 401(k) and 403(b) are similar. In many cases the employee and the employer who matches the employee's contributions can write off these costs from their taxes immediately. And, more importantly, the money that has been deposited by either side can grow for decades tax-deferred. That is to say taxes on the gains of these deposits will only be paid once the employee reaches his retirement age and begin to withdraw the money.

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