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A 403(b) is a retirement plan available to employees of educational institutions, civil government and certain non-profit organizations. Many of the benefits and characteristics afforded by a 403(b) are similar to those offered by the 401k, which covers private-sector employees. The 403(b) plan allow participants to set aside money for retirement on a pre-tax basis, and it is allowed to grow tax deferred. The tax is applied when a withdrawal is made from the 403(b).
Like most other retirement tax-shelters an early withdrawal from a 403(b) carry a penalty of 10% (in addition to income taxes. Penalty free withdrawals can be made under the following cases:
Unlike 401(k)s, these plans are not offered directly by the employer. An employer will have a list of investing companies (vendors) offering these plans for the institution. An employee can open a 403(b) with any of these vendors. Once an account is opened, the employer will deduct monthly contributions from the paycheck and wire it to the investment company.