A 403(b) is a tax-deferred retirement savings plan for employees of educational institutions and certain non-profit organizations. 403(b) refers to the section of the Internal Revenue Code that governs the plan. The 403(b) was created in 1958 and is sometimes referred to as a tax-sheltered annuity (TSA), or tax-deferred annuity (TDA). In 1974, Congress added paragraph (7) to the plan allowing employees for this first time to set up retirement plans directly with mutual fund companies. Prior to this change, participants were limited to investment choices offered by insurance companies. Investment directly in mutual funds is known as a 403(b)(7) custodial account. Throughout this site the term 403(b) is intended to mean all of the following: 403(b), 403(b)(7), TSA, and TDA. Ultimately, the 403(b) plan is a defined contribution plan, where the participant makes contributions and investment decisions, as opposed to a defined benefit plan, where the employer makes all, or a majority of contributions and all of the investment decisions.

While a majority of MCPS employees have access to either the Maryland State Teachers Pension plan or the MCPS Employees Pension System, neither plan will replace 100 percent of your income in retirement. The 403(b) plan is important because it provides a supplement to retirement income, and can reduce taxes on current income. For example, an employee earning $30,000 a year would be in the 15 percent federal tax bracket. If this employee contributed 10 percent of income or $3,000 to a 403(b), it would reduce taxable income to $27,000 ($30,000 less $3,000 403(b) contribution) and result in savings of $450 on federal income taxes (15 percent of $3,000). In this example, the $3,000 contribution would actually cost $2,550 ($3,000 less $450 tax savings).