A 403(b) retirement plan (named after a section of the federal tax code) allows employees of eligible employers to build retirement savings by setting aside a portion of their pay on a pre-tax basis. If you participate in a 403(b) retirement plan, you agree to have your employer take the money out of your earnings before you receive them and before you pay taxes on them. Your employer may elect to match all or a portion of your contribution. You will not be taxed on the money invested (by you or your employer) in a 403(b) retirement plan—or the gains on that money—until you withdraw the funds, usually at retirement. This is a tremendous advantage to you because all the earnings that would have been paid as taxes can continue to grow in your retirement plan year after year.

You will choose where to invest your money from among the vendors listed by your employer. Choices will likely include fixed annuities, variable annuities, and mutual funds. You should evaluate the performance and cost of several options before making a decision. You may want to get advice from a benefits specialist or tax professional to help you evaluate the options.

When you turn 59 1⁄2, you can access the money in your 403(b) retirement plan without penalty. You will be taxed at your ordinary income tax rate, which may be lower when you retire. Before 59 1⁄2, your access to the funds and any earnings invested in a 403(b) retirement plan is restricted. Except for special circumstances, withdrawals made prior to age 59 1⁄2 are generally subject to a 10 percent tax penalty and ordinary income taxes. Check with your tax advisor regarding tax rules that may apply to you.