What is a 403(b) Plan? A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. Individual accounts in a 403(b) plan can be any of the following types. An annuity contract, which is a contract provided through an insurance company, A custodial account, which is an account invested in mutual funds, or A retirement income account set up for church employees. Generally, retirement income accounts can invest in either annuities or mutual funds. Note. Throughout this publication, wherever the term 403(b) account is used, it refers to any one of these funding arrangements, unless otherwise specified. What are the Benefits of Contributing to a 403(b) Plan? There are three benefits to contributing to a 403(b) plan. The first benefit is that you do not pay tax on the contributions in the year they are made. You do not pay tax on them until you begin making withdrawals from the plan, usually after you retire. Contributions to a 403(b) plan are either excluded or deducted from your income. The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. The third benefit is that for years beginning after 2001, you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. For more information, see Publication 553. Excluded. If an amount is excluded from your income, it is not included in your total wages on your Form W-2. This means that you do not report the excluded amount on your tax return. Deducted. If an amount is deducted from your income, it is included with your other wages on your Form W-2. You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax.