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MyfreetaxMyfreetax 1. Myfreetax 403(b) Plan Basics Table of Contents What Is a 403(b) Plan? What Are the Benefits of Contributing to a 403(b) Plan?Excluded. Myfreetax Deducted. Myfreetax Who Can Participate in a 403(b) Plan?Ministers. Myfreetax Who Can Set Up a 403(b) Account? How Can Contributions Be Made to My 403(b) Account? Do I Report Contributions on My Tax Return? How Much Can Be Contributed to My 403(b) Account? This chapter introduces you to 403(b) plans and accounts. Myfreetax Specifically, the chapter answers the following questions. Myfreetax What is a 403(b) plan? What are the benefits of contributing to a 403(b) plan? Who can participate in a 403(b) plan? Who can set up a 403(b) account? How can contributions be made to my 403(b) account? Do I report contributions on my tax return? How much can be contributed to my 403(b) account? What Is a 403(b) Plan? A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. Myfreetax Individual accounts in a 403(b) plan can be any of the following types. Myfreetax An annuity contract, which is a contract provided through an insurance company, A custodial account, which is an account invested in mutual funds, or A retirement income account set up for church employees. Myfreetax Generally, retirement income accounts can invest in either annuities or mutual funds. Myfreetax We use the term “403(b) account” to refer to any one of these funding arrangements throughout this publication, unless otherwise specified. Myfreetax What Are the Benefits of Contributing to a 403(b) Plan? There are three benefits to contributing to a 403(b) plan. Myfreetax The first benefit is that you do not pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Myfreetax Allowable contributions to a 403(b) plan are either excluded or deducted from your income. Myfreetax However, if your contributions are made to a Roth contribution program, this benefit does not apply. Myfreetax Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free. Myfreetax Note. Myfreetax 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. Myfreetax See chapter 4, Limit on Elective Deferrals , for more information. Myfreetax The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. Myfreetax Earnings and gains on amounts in a Roth contribution program are not taxed if your withdrawals are qualified distributions. Myfreetax Otherwise, they are taxed when you withdraw them. Myfreetax The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. Myfreetax See chapter 10, Retirement Savings Contributions Credit (Saver's Credit) . Myfreetax Excluded. Myfreetax If an amount is excluded from your income, it is not included in your total wages on your Form W-2. Myfreetax This means that you do not report the excluded amount on your tax return. Myfreetax Deducted. Myfreetax If an amount is deducted from your income, it is included with your other wages on your Form W-2. Myfreetax You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax. Myfreetax Who Can Participate in a 403(b) Plan? Any eligible employee can participate in a 403(b) plan. Myfreetax Eligible employees. Myfreetax The following employees are eligible to participate in a 403(b) plan. Myfreetax Employees of tax-exempt organizations established under section 501(c)(3). Myfreetax These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations. Myfreetax Employees of public school systems who are involved in the day-to-day operations of a school. Myfreetax Employees of cooperative hospital service organizations. Myfreetax Civilian faculty and staff of the Uniformed Services University of the Health Sciences. Myfreetax Employees of public school systems organized by Indian tribal governments. Myfreetax Certain ministers (explained next). Myfreetax Ministers. Myfreetax The following ministers are eligible employees for whom a 403(b) account can be established. Myfreetax Ministers employed by section 501(c)(3) organizations. Myfreetax Self-employed ministers. Myfreetax A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer. Myfreetax Ministers (chaplains) who meet both of the following requirements. Myfreetax They are employed by organizations that are not section 501(c)(3) organizations. Myfreetax They function as ministers in their day-to-day professional responsibilities with their employers. Myfreetax Throughout this publication, the term chaplain will be used to mean ministers described in the third category in the list above. Myfreetax Example. Myfreetax A minister employed as a chaplain by a state-run prison and a chaplain in the United States Armed Forces are eligible employees because their employers are not section 501(c)(3) organizations and they are employed as ministers. Myfreetax Who Can Set Up a 403(b) Account? You cannot set up your own 403(b) account. Myfreetax Only employers can set up 403(b) accounts. Myfreetax A self-employed minister cannot set up a 403(b) account for his or her benefit. Myfreetax If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit. Myfreetax How Can Contributions Be Made to My 403(b) Account? Generally, only your employer can make contributions to your 403(b) account. Myfreetax However, some plans will allow you to make after-tax contributions (defined below). Myfreetax The following types of contributions can be made to 403(b) accounts. Myfreetax Elective deferrals . Myfreetax These are contributions made under a salary reduction agreement. Myfreetax This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. Myfreetax Except for Roth contributions, you do not pay income tax on these contributions until you withdraw them from the account. Myfreetax If your contributions are Roth contributions, you pay taxes on your contributions but any qualified distributions from your Roth account are tax free. Myfreetax Nonelective contributions . Myfreetax These are employer contributions that are not made under a salary reduction agreement. Myfreetax Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer. Myfreetax You do not pay income tax on these contributions until you withdraw them from the account. Myfreetax After-tax contributions . Myfreetax These are contributions (that are not Roth contributions) you make with funds that you must include in income on your tax return. Myfreetax A salary payment on which income tax has been withheld is a source of these contributions. Myfreetax If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return. Myfreetax A combination of any of the three contribution types listed above. Myfreetax Self-employed minister. Myfreetax If you are a self-employed minister, you are considered both an employee and an employer, and you can contribute to a retirement income account for your own benefit. Myfreetax Do I Report Contributions on My Tax Return? Generally, you do not report contributions to your 403(b) account (except Roth contributions) on your tax return. Myfreetax Your employer will report contributions on your 2013 Form W-2. Myfreetax Elective deferrals will be shown in box 12 and the Retirement plan box will be checked in box 13. Myfreetax If you are a self-employed minister or chaplain, see the discussions next. Myfreetax Self-employed ministers. Myfreetax If you are a self-employed minister, you must report the total contributions as a deduction on your tax return. Myfreetax Deduct your contributions on line 28 of the 2013 Form 1040. Myfreetax Chaplains. Myfreetax If you are a chaplain and your employer does not exclude contributions made to your 403(b) account from your earned income, you may be able to take a deduction for those contributions on your tax return. Myfreetax However, if your employer has agreed to exclude the contributions from your earned income, you will not be allowed a deduction on your tax return. Myfreetax If you can take a deduction, include your contributions on line 36 of the 2013 Form 1040. Myfreetax Enter the amount of your deduction and write “403(b)” on the dotted line next to line 36. Myfreetax How Much Can Be Contributed to My 403(b) Account? There are limits on the amount of contributions that can be made to your 403(b) account each year. Myfreetax If contributions made to your 403(b) account are more than these contribution limits, penalties may apply. Myfreetax Chapters 2 through 6 provide information on how to determine the amount that can be contributed to your 403(b) account. Myfreetax Worksheets are provided in Chapter 9 to help you determine the maximum amount that can be contributed to your 403(b) account each year. Myfreetax Chapter 7, Excess Contributions , describes how to prevent excess contributions and how to get an excess contribution corrected. Myfreetax Prev Up Next Home More Online Publications
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