403(b) plans, also known as “Tax Sheltered Annuities,” were established in 1958 for public school teachers and nonprofit employees to save for retirement. Originally limited to annuities, the plans were amended in 1974 to allow more investment options. They became popular in the 1980s as an alternative to 401(k) plans. Both plans allow pre-tax contributions, but withdrawals before age 59½ are taxed and penalized. Roth accounts are also an option for tax-free earnings.
In the United States, the Internal Revenue Code refers to any retirement savings account established under the provisions of Section 403(b) as a “Tax Sheltered Annuity.” These accounts, commonly called “403(b)” plans or accounts, were originally restricted to investing only in annuities from the time the Section was established in 1958 until it was amended in 1974 to allow more investment options, including funds. mutual. Available only to employees of public schools and certain other nonprofit organizations, 403(b) plans became very popular in the 1980s as the nonprofit alternative to 401(k) retirement plans, which established in 1978.
Retirement security has been a pressing issue in the United States since the Great Depression of the early 1930s, when millions of families were left destitute. The establishment of Social Security provided a measure of security, but that plan was not intended to be the full retirement income of a retiree. Company-provided pension plans, generally of the defined benefit model, became popular after World War II and in the mid-century, but as time passed, the financial burden on employers of these plans became onerous. . On the other hand, many nonprofit employers and public school systems did not provide any retirement programs for their employees.
Section 403(b) of the Code was passed in 1958 to address the needs of public school teachers and other employees of nonprofit organizations because their employers often did not have the assets to provide defined benefit pension plans. School systems and other nonprofit organizations, at almost negligible cost, could allow each employee to establish a tax-sheltered annuity and take advantage of the tax advantages associated with it. In 1978, Congress passed Section 401(k) of the Internal Revenue Code, which shifted the burden of retirement savings from employers to the employees themselves. These plans were generally oriented toward capital investment, primarily stock and bond mutual funds, and money market accounts.
Participants in 403(b) and 401(k) plans are allowed to save money from their earnings on a pre-tax basis, meaning the money is taken out of their pay and put into the retirement savings plan before they Paying taxes. Contributions, along with any earnings, can grow untaxed until withdrawn. If you withdraw before age 59½, the income is taxed as ordinary income, and in most cases, a significant penalty is added.
Another approach to retirement savings planning, the Roth account, can be implemented in both plans. Contributions to a Roth account are made on an after-tax basis, but earnings from a Roth account are tax-free. A tax-sheltered annuity can be set up like a Roth account.
The term “tax-sheltered annuity” used to describe 403(b) plans is perhaps archaic because not only are annuities one of the investment options available, but every annuity is a tax-sheltered annuity, whether purchased through a employer-provided plan such as a 401(k), 403(b), or other special plan, or simply purchased independently by a consumer.
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