What defines a 403(b) retirement plan?

A 403(b) retirement plan is primarily defined as a deferred compensation plan that is established for employees of certain tax-exempt organizations, such as schools, hospitals, and non-profits. Under this arrangement, employees can elect to have a portion of their income contributed to the plan on a pre-tax basis, which allows their savings to grow tax-deferred until withdrawal, usually in retirement.

The concept of deferred compensation is central to a 403(b) plan because it entails postponing income to a future date, which is significantly beneficial for tax planning and savings growth. This feature is compared to other retirement plans, where contributions also serve to provide benefits in the future, but the specific designation of a 403(b) as a deferred compensation plan underscores its operation and purpose in supporting employees of eligible organizations.

This understanding clarifies the plan's tax advantages and operational mechanics, emphasizing its function as a vehicle for retirement savings rather than as a fixed retirement benefit plan or a type of pension fund. While it offers various investment options, the defining characteristic remains its nature as a deferred compensation plan tailored for employees in qualifying sectors.