Understanding 403(b) Retirement Plans

Retirement planning can be a daunting task, especially if you're not sure where to start. But if you're a teacher or work for a qualifying nonprofit organization, public school, or government agency, you may have access to a valuable retirement savings option: a 403(b) plan.

A 403(b) plan is a type of retirement plan available to employees of certain nonprofit organizations, public schools, and government agencies. It's similar to a 401(k) plan but with some differences in terms of eligibility, contribution limits, and investment options. Like any retirement savings plan, understanding the ins and outs of a 403(b) can be complex.

Here’s what you need to know:

Contribution Limits

The maximum amount you can contribute to a 403(b) plan in 2023 is $22,500. If you're age 50 or older, you can also make catch-up contributions of up to $7,500.

Employer Contributions

Some employers offer matching contributions to their employees 403(b) plans. This means that for every dollar you contribute, your employer may also contribute a certain percentage, up to a certain limit. Some employers offer contributions regardless of whether you contribute or not, so be sure to look into this so that you don’t miss out on any potential free money!

Vesting

Vesting refers to the amount of time you need to work for an employer before you become eligible to keep their contributions to your 403(b) plan. Vesting schedules vary by employer. Keep in mind, vesting only applies to your employer’s contributions. Your contributions are always 100% vested!

Investment Options

403(b) plans typically offer a range of investment options, the most common being mutual funds and annuities. It is up to each district whether they offer pre-tax contributions and/or post-tax contributions, matching contributions, and whether they provide multiple 403b vendors to choose from. The first step is to gather information from your HR department about what they offer. If you do have multiple 403b vendors to choose from, opt for a vendor that offers mutual funds rather than annuities.

Here’s a tip: You might hear the term TSA referred to synonymously with 403b. TSA stands for tax-sheltered annuity and was the original retirement plan offered for teachers. Because of this, annuities are still very predominant in the school districts. However, I like to look at annuities within a 403b plan as opening an umbrella indoors. The benefit of a TSA is that it is tax-sheltered but you are already getting those same tax benefits underneath the 403b so there is usually no need for the extra fees associated with annuities.

It's important to research and understand these options before making investment decisions. If you have any questions about 403bs and choosing the right option for you, schedule a call with us today.

Withdrawal Rules

You can't withdraw funds from a 403(b) plan penalty-free until you reach age 59½, or age 55 if you are separated from service, unless you qualify for an exception. If you withdraw funds before this age, you'll typically have to pay a 10% early withdrawal penalty, in addition to income tax on the withdrawn amount.

Read our blog, Financial Planning for Teachers, for more education and helpful tips!

If you're interested in opening a 403(b) plan or learning more, schedule a call with us.

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.