If you work for a public school, state college, university or other tax-exempt organization, your employer may offer a 403(b) retirement plan -- also called a tax-sheltered annuity, or TSA for short. As a participant in the plan, you typically make contributions with pretax money. If the plan allows it, however, you may contribute with post-tax, or after-tax, money.
Salary Reduction Agreement
For your employer to withhold 403(b) contributions from your paychecks, you must give your consent via a salary reduction agreement. On the agreement, you indicate the amount you want withheld from your salary each pay period.
A pretax 403(b) plan is similar to a traditional 401(k) plan in that they both allow you to make pretax contributions. You do not pay federal income tax, and, in most cases, state income tax on your contributions; however, Medicare tax and Social Security tax applies. Your pretax contributions are therefore excluded from your taxable wages on your W-2, but they are counted in your Social Security and Medicare taxable wages. Because you haven't paid income tax on this money, eventually -- typically during retirement when you receive payments -- you will pay income tax on it.
If the plan allows you to make post-tax contributions, such as via a Roth 403(b) plan, your employer takes federal and state income taxes and Social Security and Medicare taxes out of your contributions. Post-tax contributions are included in your federal, state and Social Security and Medicare taxable wages on your W-2. When you later receive payments from this type of plan, you do not owe any income taxes on your own contributions; however, you must pay taxes on your employer’s matching contributions, if any.
Under IRS rules, you can contribute up to a certain amount to your 403(b) plan yearly. As of 2013, you can generally contribute up to $17,500 in pretax or post-tax money. If you are 50 or over, you may contribute an additional $5,500 for the year. If the plan allows it, you might qualify for an annual limit of up to $20,000 if you have worked for a public school system, health and welfare service agency, church, hospital or home health service agency for at least 15 years.