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403B Plans

The 403(b) has long been the retirement plan of choice for employees of public schools, universities, and nonprofit organizations such as hospitals, churches, and charitable institutions. In the past, however, 403(b) participants have also contended with an unwieldy set of contribution regulations that often made the investment process a headache.

Fortunately, the tax bill of 2001 eliminated most of these complications, making the 403(b) much more like its better-known sibling, the 401(k) plan. As with the 401(k), a 403(b) will allow you to make pretax contributions to your plan, and your investments will be protected from taxes until you make a distribution.

Not all of the differences have been eliminated. Investment choices, for example, aren't confined to a list of mutual funds. Instead, 403(b) options consist mainly of annuities, which are insurance products that guarantee a minimum periodic payout at retirement. In addition to traditional fixed annuities, most 403(b) plans offer variable annuities, which offer beyond their insurance components mutual fund-like investments called "subaccounts." Annuity policies can vary greatly in terms of fees, penalties, payouts, and survivor benefits; as a result, the 403(b) investor has a lot to consider when choosing a portfolio.

Deciding how much to contribute to a 403(b), on the other hand, has gotten easier. The old maximum exclusion allowance (MEA) and so-called alternative rules have now (thankfully) gone the way of the abacus. Catch-up provisions (a way to make up for paltry contributions in earlier years), once the sole province of the 403(b), now are available to employees aged 50 or older in 403(b), 401(k), and 457(b) plans. But the special case for 403(b)s-a catch-up exception for current employees with at least 15 years of service-remains in effect for now.

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