In retirement terminology, the term 403(b) Plan refers to a United States retirement plan which meets the requirements of the Internal Revenue Code or IRCís Section 403(b). This section of the IRC defines and details the qualification rules for 403(b) trusts and plans, which have many of the characteristics of a 401(k) Plan. Nevertheless, the 403(b) Plan is intended for employees of religious institutions, public schools, non-profit organizations and other tax-exempt corporations.
For example, like with a 401(k), employees make monthly contributions to their 403(b) Plan fund which may or may not be matched by the employer. Such funds are placed either in a custodial account, where the funds are invested in mutual funds, or are invested in an annuity which is done through an insurance company. This is the reason that such accounts are also referred to as tax-sheltered annuities. For some types of organizations, such as for employees of religious organizations, a retirement income account is generally used. As in other retirement plans, early withdrawal is penalized 10% by the IRS, and withdrawals are taxed as regular income at the time of disbursement.