Salary Reduction

• The 403b plan works by reducing the amount of your salary subject to current taxation. Every dollar you invest in the plan is one more dollar that is not subject to taxes, so the more you invest, the more you can lower your tax bill. Even if you cannot afford to contribute the maximum amount for the year, it pays to invest as much as you possibly can, since every extra dollar represents one more dollar that is not subject to taxes.
  
  

Tax-Deferred Growth

• The money you put in your 403b plan is allowed to grow and compound on a tax-deferred basis. This is a very important distinction, since taxes can really eat into your investment return over time. Since there are no taxes due on the earnings of the 403b plan each year, you do not have to worry about the erosive impact of taxation on your portfolio and its performance.
  
  

Taxes in Retirement

• The funds you set aside in your 403b plan are designed to help you save for a more comfortable retirement. The money you set aside can grow for years, or decades, with no tax consequences whatsoever. The money is only taxed when you actually start drawing it out in retirement. When you do start tapping those funds, the amount you withdraw is taxed at the prevailing rates applicable at that time.
  
  

Contribution Limits

• Investing in a 403b plan is one of the best ways you have to shelter a large amount of money from the tax man. While the 2010 and 2011 limit for a traditional or Roth IRA is a mere $5,000, the contribution limit for a 403b plan is much more generous. If you are 49 years of age or younger, you can contribute up to $16,500 to your 403b plan through salary deferrals. If you are 50 or older, you can contribute an extra $5,500 to the plan, for a total contribution limit of $22,000. Every dollar you invest reduces your taxable income by that amount, and that allows you to reduce your tax bill substantially.