Significance

• A 403b plan allows contributions to a retirement plan in addition to your employer's pension plan. You usually make the 403b plan contributions on a pretax basis. Money is taken out of your paycheck to fund the account. The investment inside of the plan is also normally an annuity. An annuity is an insurance policy that pays either a fixed rate of return set by the insurance company or a nonguaranteed rate of return determined by the performance of mutual funds inside of the annuity.
  
  

Benefit

• The benefit to you, by using a 403b plan, is that your adjusted gross income is reduced by the amount of your contribution amount. The contribution amount thus increases the amount of net income you have to spend during your working years. This may have a net effect of increasing the amount of the refund you get back from your tax return, depending on whether this reduced adjusted gross income lowers your tax rate when combined with other tax deductions you have.
  
  

Disadvantage

• The disadvantage to a 403b plan is that you may end up trading increased income now for higher taxes later when you retire. Your employer gives you a pension. You draw income from the 403b plan. Combine this with Social Security and you may end up with a good deal of income every month. The problem with this is that your Social Security income is taxed as ordinary income when at least half of your Social Security income plus all of your other retirement income exceeds $25,000 if you're single or $32,000 if you're married.
  
  

Consideration

• Some 403b plans allow Roth-designated contributions. A Roth-designated contribution is a contribution that is not tax deductible. Your tax return remains unaffected and your adjusted gross income does not go down. Instead, you get tax-free income during retirement. This option is also beneficial in regards to Social Security income since you may transfer your 403b plan to a Roth IRA after you retire. Withdrawals from a Roth IRA are not factored into the calculation to determine whether Social Security benefits are taxable or not.