Contributions to a 403(b) salary deferral retirement program

The IRS approved 403b salary deferral retirement program: Contributions to these type plans are tax deductible, tax deferred while inside plan, and taxable as ordinary income upon distribution.

Every dollar contributed, up to the deferral limit, to your 403b plan is tax deferred. Your gross income is reduced by the amount of contribution to the plan and this consequently lowers your current federal income tax liability. There is no current tax within the plan on gains, dividends and interest income. Tax-deductible contributions to the 403b plan can only come from salary deductions and these deducted monies can only be placed into plans offered through and made available by your employer. An employee cannot directly fund their plan.

Withdrawals: The 403b plan is typically designed for retirement; but, prior to retirement access is available by simply withdrawing the funds; however, the IRS will impose normal income taxes on the disbursement plus a 10% penalty tax for early withdrawal. This 10% penalty tax might be waived for financial hardship reasons, or if disabled based on the IRS’s disability definition. Access is also available through loans.

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