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Practice Management

Benefits of Contributing to a 403(b) Plan

Q. What are the benefits of contributing to a 403(b) plan?

A. There are three benefits to contributing to a 403(b) plan.

1. The first benefit is that you don’t pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 403(b) plan are either excluded or deducted from your income. However, if your contributions are made to a Roth contribution program, this benefit doesn’t apply. Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free.
Note. Generally, employees must pay social security and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement. 

2. The second benefit is that earnings and gains on amounts in your 403(b) account aren’t taxed until you withdraw them. Earnings and gains on amounts in a Roth contribution program aren’t taxed if your withdrawals are qualified distributions. Otherwise, they are taxed when you withdraw them.

3. The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account.