A 403(b) retirement plan is a tax-advantaged retirement plan for non-profit organizations and some government agencies. The 403(b) functions similarly to its more well-known sister, the 401(k), but it provides a few unique perks, such as increased catch-up contributions for tenured employees. Here’s what you need to know if you’re saving for retirement with a 403(b) account.
· A 403(b) retirement plan is a tax-advantaged retirement plan for employees of non-profit organisations such as churches and hospitals, as well as some public-sector workers such as teachers and librarians.
· 403(b)s, like other employer-sponsored retirement plans, provide tax-advantaged growth for your retirement assets. This means that the investments you buy and sell in your account are tax-free, which helps you grow your retirement nest egg.
· Your payments to a 403(b) account are taken from your salary. Contributions to a typical 403(b) are withdrawn from your salary before taxes, lowering your overall tax bill. However, when you take funds from your retirement account, you must pay income taxes on the withdrawals.
· If your company provides a Roth 403(b), you can fund your account with money that has already been taxed. When you take money from the account later, you will not be taxed—even on investment earnings, regardless of how much your money has grown.
Dive into the Basics of 403(b)
Traditional and Roth 403(b) plans are the two most common forms of 403(b) plans. Employees are not always given access to the Roth version by their employers.
A standard 403(b) plan allows employees to have pre-tax money withdrawn from their paychecks and deposited into a personal retirement account. The employee has saved some money for the future while also lowering his or her gross income (and income taxes owed for the year). Only when the employee withdraws the money will taxes be owed.
A Roth 403(b) requires that money be placed into the retirement plan after taxes. 6 There is no immediate tax benefit. However, the employee will not have to pay any additional taxes on the money or the profit that accrues when it is withdrawn.
Did You Know?
Clergy can likewise join in a 403(b), but there is a particular plan type—a 403(b)(9)—designed exclusively for religious institution workers.
The Good and the Bad of a 403(b) Plan
There are unique advantages and disadvantages to having a 403(b) plan. Some of the most prevalent are noted here.
· Earnings and returns on contributions to a standard 403(b) plan are tax-deferred until withdrawn. If the withdrawals are qualifying distributions, earnings and returns on funds in a Roth 403(b) are tax-deferred.
· Certain 403(b) plans are exempt from the Employee Retirement Income Security Act’s onerous supervision requirements (ERISA).
· As a result, these plans typically have a reduced administrative expense, putting more money back into the employee’s hands.
· Many 403(b) plans vest assets over a shorter period of time than 401(k) plans, and some even allow for instant vesting, something 401(k) plans seldom do.
· Employees with 15 years or more of employment with some organisations or government agencies may be eligible for extra catch-up contributions to a 403(b) plan.
· Withdrawals from a 403(b) plan before the age of 59.5 is subject to a 10% tax penalty. However, you may prevent the penalty in certain situations, such as leaving an employment at the age of 55 or older, incurring a qualifying medical expenditure, or becoming handicapped.
· A 403(b) plan may have fewer investment options than other plans, despite the fact that these plans now include mutual fund alternatives under variable annuity contracts. You may only pick between fixed and variable contracts or mutual funds—other instruments, such as stocks and real estate investment trusts (REITs), are not permitted.
· Another downside of non-ERISA 403(b)s is that they are not subject to nondiscrimination testing. This testing, which is done on a yearly basis, is intended to prevent management-level or highly compensated workers from collecting a disproportionate amount of benefits from a specific plan.
Did You Know? Employers are not permitted to contribute to their workers’ non-ERISA 403(b) plans.
How to Start a 403b Plan?
Investment opportunities in 403(b) plans are fairly limited in comparison to other tax-advantaged retirement plans. In general, you can pick between mutual funds and annuities. Individual equities, exchange-traded funds (ETFs), or real estate investment trusts are normally not permitted to be invested in 401(k)s (REITs).
Having said that, many 403(b) plans will provide you with the low-cost bond and stock index funds that most experts suggest for retirement investment. You should choose a stock-bond fund ratio that reflects the amount of time you have till retirement as well as your willingness to take on risk. When you’re young, you should invest in more stock funds, and as you get older, you should invest in more bond funds.
Target-date funds, if available in your 403(b) plan, can considerably simplify your investing approach. Target-date funds are mutual funds that automatically change their holdings to help you as you approach your retirement date.
You can also use your 403(b) plan to invest some or all of your retirement assets in an annuity Annuities are sophisticated financial products with high costs and lower-than-market returns; thus, consult with a financial counsellor before entering into one.
If your 403(b) plan does not provide the options you need, you can complement your portfolio with an individual retirement account (IRA). However, if your workplace offers a 403(b) equivalent, be sure you’re contributing enough to receive it before investing in an IRA.
Who is it for?
Individuals working by schools and other tax-exempt organisations, as previously stated, can save for retirement by contributing to a 403(b) plan through payroll deductions. The plan is similar to the 401(k) plan that private-sector employees use. Participants may include the following:
· Employees of public schools, state institutions, and community colleges
· Employees of Indian tribal administrations who work in public schools
· Employees of the church
· Employees of 501(c)(3) tax-exempt organisations
· Ministers and clergymen
401K vs 403b: Similarities and Differences
The 403 b plans is commonly referred to as the 401(k)’s cousin, and the two plans are quite similar. The annual contribution limitations are nearly equal, as are the restrictions controlling withdrawals. Both permit pre-tax and post-tax Roth contributions, as well as employer contributions. However, there are a few distinctions:
· Different Types of Employers
The 401(k) plan is designed for private-sector businesses, whereas the 403 b plan is designed for non-profit and government organisations.
· Exemptions from ERISA
Employees and their retirement funds are safeguarded under the Employee Retirement Income Security Act (ERISA).
Employers who provide 403(b) plans are not required to follow certain ERISA standards, unlike private-sector enterprises that offer 401(k)s. Some programmes may disregard anti-discrimination regulations, preventing some employees from gaining preferential treatment.
Notably, these ERISA exclusions often prohibit employers from making 403(b) plan deposits.
· Short Vesting Periods
Contributions from employers to tax-advantaged retirement plans sometimes have a vesting period.
This implies that employer contributions may not become the employee’s property right away, and if they quit a company before a set period of time, often up to six years, they may forfeit some or all of their collected employer contributions.
403(b) plans either do not have vesting periods or have very short vesting periods.
Investing in a 403 b plan is a tax-advantaged strategy to save for retirement and accumulate wealth for the future. However, depending on the investment possibilities in your 403(b), you may wish to invest in a retirement account outside of your company, such as an IRA.
A 403(b) plan, commonly known as a tax-sheltered annuity plan, is a retirement plan available to some public school workers, employees of Code Section 501(c)(3) tax-exempt organisations, and certain pastors. Employees can contribute a portion of their pay to a 403(b) plan. The company may also contribute to the employee benefit plan.
In general, 403(b) plans can be established by public schools, Code Section 501(c)(3) tax-exempt organizations, or churches.
Participants in a 403(b) plan benefit from considerable tax benefits, including pre-tax contributions to a 403(b) plan, and gains on these funds are not taxed until they are received from the plan.
In general, all workers must be able to make voluntary deferrals to a 403(b) plan. According to the universal availability rule, if a company allows one employee to defer compensation by contributing to a 403(b) plan, the firm is required to make this offer to all employees in the organisation.
A 403(b) plan’s assets can be invested in any of the following types of investments:
· an insurance company-provided annuity contract;
· a custodial account invested in mutual funds;
· or a retirement income account established for church personnel