403(b)(7) Accounts

In 1958, Section 403(b) of the Internal Revenue Code provided employees of 501(c)(3) non-profit institutions the opportunity to establish retirement savings programs by deferring pre-tax dollars to tax sheltered annuities. In 1974, Congress added paragraph (7) allowing employees to set up custodial accounts directly with mutual fund companies.

How It Works:

A participant in a 403(b)(7) sets aside money for retirement on a pre-tax basis through a salary reduction agreement with their employer. They choose from the mutual fund investments offered by a designated brokerage firm, and the employer sends contributions to the firm to be invested. Contributions and investment earnings grow tax deferred until withdrawal (assumed to be retirement) at which time they are taxed as ordinary income.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) has increased the amount that individuals can contribute to a 403(b)(7). To find out how much can be contributed, visit our plan limits page. To find out more about changes brought on by EGTRRA, visit our EGTRRA page.

For more information about 403(b)(7) plans and other retirement plans, visit our Frequently Asked Questions.