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A 403(b) is a retirement plan provided by employers in nonprofit organizations. This includes school systems, hospitals and healthcare systems and religious organizations. 403(b) plans are similar to 401(k) plans which are provided by employers engaged in for-profit businesses. 

Contributions to a 403(b) plan are pre-tax and come directly out of your paycheck. In the eyes of the government you've actually earned less (your 403(b) contribution is deducted from your earnings) so you are taxed less.

Earnings on 403(b) accounts are not taxed until they are distributed from the plan.