Non Profit organizations e.g. schools, colleges, and charities allow tax deferred annuity and 403(b) plans. Retirement plans for government employees are also called as 457 plans. If you are an employee of these organizations, you are also allowed to take advantage of tax deferred retirement plans.

A 403(b) plan is available to the employees of a tax exempt organization like educational institutions, hospitals, home health services organizations, churches, and other religious institutions. Similar to employer sponsored retirement plans of for profit organizations, this plan allows a maximum employee contribution of $18,000. Your contribution to the plan is via salary reduction and it is federal tax free. However, it is subject to Social Security taxes. The contribution has 2 catch up provisions. If you are age 50 years or older, you are allowed to contribute additional $6,000. The other catch up provision comes from your tenure at this tax exempt organization. If you have completed 15 consecutive years of service then you can contribute additional money to your retirement plan. This catch up provision is also known as 15-year-rule. Under this catch up provision, the additional amount that you can contribute in a given year is the least of:

  • $3,000
  • $18,000 minus any amount contributed under this provision in prior years
  • $6,000 times years of service with current employer minus sum of all prior contributions under this catch up provision.

Note that you are allowed to take advantage of both catch up provisions if you are eligible. …Show details

In terms of investments, under this plan you are allowed to purchase annuities (fixed as well as variable) or mutual funds. Some employers permit both annuities and mutual funds and you can decide if you want to share your contribution among them. Any money you withdraw from this account prior to retirement age of 59.5 years is subject to income taxes and early withdrawal penalties of 10%. Withdrawals past retirement age are subject to income taxes only. However, before retirement the plan may allow loans and withdrawals in case of death or disability.

A 457 plan is available to the employees of a governmental units and agencies. They are also available to those tax exempt organization which are not educational institutions, hospitals, home health services organizations, churches, and other religious institutions. Similar to employer sponsored retirement plans of for profit organizations and 403(b) plan participants, this plan allows a maximum employee contribution of $18,000. You can contribute twice as much during 3 years before retirement. Your contribution to the plan is via salary reduction and it is federal tax free. If you are age 50 years or older, you are allowed to contribute additional $6,000. Your contributions are free from federal taxes. However, they are subject to Social Security taxes.

Any money you withdraw from this account prior to retirement age of 59.5 years is subject to income taxes and early withdrawal penalties of 10%. Withdrawals past retirement age are subject to income taxes only. However, before retirement the plan may allow loans and withdrawals in case of death or disability.

  • Check with your employer if it has set up a tax deferred retirement plan
  • Assess your retirement needs
  • Review your risk tolerance and time left to retire to determine a diversified mix of mutual funds available in your plan
  • Take advantage of catch up provision(s) to maximize your contribution. Importance of early savings can’t be emphasized enough. If you are part of 403(b) plan and have 15 years of uninterrupted service with this employer, take a careful look at 15-year-rule on catch contribution. On the other hand if you are participating in a 457 plan and nearing retirement, consider 3 year rule prior to retirement.