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The Benefits of a 403(b) Plan for Educators and Public Servants

13 May - Posted at 21:56h in Financial Planning

If you're an educator or public servant considering the pros and cons of a 403(b) plan rather than other retirement savings plans, you are not alone. Understanding all of the benefits of a 403(b) plan can be tricky, but there are many beneficial reasons to have a 403(b) plan.

Tax Advantages

Pre-tax Savings

If you have a traditional 403(b) account, you will have the advantage of pre-tax savings. When deferring compensation into this account, before any income taxes are taken out, your paycheck will be reduced by the amount you want to invest into your plan. This results in a lower total taxable income.

Tax-deferred Growth Potential

Another advantage of a traditional 403(b) plan is tax-deferred growth potential. Taxes on investment earnings in a traditional 403(b) retirement plan are deferred as well. You don't pay taxes on anything your investment earns until it is distributed. Taxes on distributions/withdrawals are taxed as ordinary income, but many investors find themselves in a lower tax bracket by the time they retire, so the impact of taxes may be minimized.

Roth 403(b)

If you have a Roth 403(b) instead of a traditional 403(b), you have the potential for tax-free growth on your investment, as well as tax free account distributions with qualified plans. This is because your contributions are made with after-tax dollars.

Catch Up Contributions

403(b) plans what's called the “Over Age 50 Catch Up” provision. This allows employees over the age of 50 to increase their maximum overall retirement savings by making additional contributions to their 403(b) plan beyond the maximum limits each year. There is also a provision called the “Years of Service Catch-up” provision which allows 403(b) participants with 15 years of service to make additional contributions. This provision is only available with certain qualified employers.

Flexible Distribution Options

With a traditional 403(b) plan, account assets can be withdrawn without penalty after the age of 59½, even if you are still employed. Once you hit age 70½, account distributions are mandatory, unless you are still employed by your 403(b) employer.

If you have a Roth 403(b), distributions may begin at age 59½, provided your employer's plan allows you to do this. Otherwise, you can begin making withdrawals once you separate from service. Roth 403(b) plan distributions are not mandatory until the participant's death, if the account is rolled over to a Roth IRA.

Guidance from Financial Professionals

Appreciation Financial experts have extensive knowledge and experience when it comes to 403(b) plans. We are available to help you as you save for the future. Our professionals can answer your questions, provide information about your 403(b) plan and terms, and provide ongoing guidance throughout your journey toward retirement. Call us today to learn more about 403(b) plans.