Final answer:
A 403(b) plan is a tax-deferred retirement savings plan for certain employees, such as those in public education and non-profit sectors, that allows both employer and employee contributions. These plans are portable and can help protect against inflation by potentially generating real rates of return through various investment vehicles.
Step-by-step explanation:
A 403(b) plan, often referred to as a Tax-Sheltered Annuity (TSA), is a retirement savings plan available to certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers.
These plans are a form of defined contribution plan where the employer may contribute a fixed amount to the worker's retirement account on a regular basis, and the employee can contribute as well.
The contributions made are usually done every paycheck.
The key benefits of a 403(b) plan are that they are tax deferred, meaning taxes on these contributions are paid upon withdrawal, and they offer portability, which allows employees to maintain their retirement plans when changing jobs.
Unlike traditional pensions, 403(b) plans are invested in a range of investment vehicles, giving retirees the potential to generate real rates of return.
This approach can help protect the savings from the erosion of purchasing power due to inflation, a concern often associated with fixed-rate pension plans.
The ability to save through tax-advantaged workplace retirement accounts like 403(b)s and 401(k)s has become increasingly important as traditional defined benefits retirement plans become less common.