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403(b): What Is It and Is It the Right Investment Strategy for You?

02 Aug - Posted at 22:35h in Pension Plan

As a teacher, you most likely have a pension plan offered by your employing school district. But many educators are worried that it won't provide enough for retirement or merely want to dabble in additional investment strategies.

For teachers and many other employees of non-profit organizations, the 403(b) offers an excellent investment opportunity. In this article, the experts at Appreciation Financial examine the 403(b) in detail, offering insight into whether it could be the right investment strategy for you.

What Is a 403(b) Plan?

Everyone has heard of the 401(k) plan because it gets the majority of media and investor attention. But the 403(b) is actually quite common, with millions of American teachers and non-profit workers enrolled in this type of investment plan. In fact, one in five American workers has a 403(b) plan.

Along with pensions, school districts typically offer 403(b) plans to their employees. They are widespread in non-profit organizations as well.

In most cases, money invested into a 403(b) plan enters tax-free and is only taxed when it is withdrawn, usually at the time of retirement.

Why is tax deferment until when the funds are withdrawn sometimes preferred?

  1. During retirement, many people are included in a lower tax bracket
  2. Your money grows tax-free

If you think you will be at a lower tax bracket after retirement, it makes the 403(b) an attractive option. But if you believe you will be in a higher tax bracket after you stop working, you'll probably want to stay away from the 403(b).

Because money in a 403(b) grows tax-free, the IRS does not get a cut of your investment gains as it would if your money were invested elsewhere.

All 403(b) Plans Are Not The Same

It is important to note that all 403(b) plans are not created equal. But how do you know if the 403(b) plan offered by your employer is a quality one?

First, it should offer low-cost and passive options, including Exchange Traded Funds (ETFs).

Second, make sure the 403(b) plan offered includes Employee Retirement Income Security Act (ERISA) protections. Plans backed by ERISA include minimum standards for retirement plans.

If the specific 403(b) plan you are exploring doesn't include these features, you might want to weigh the benefits of some other retirement plan options.

What to Look for When Considering a 403(b)

Make sure your 403(b) plan is diversified across a broad array of industries, counties, and representations. That makes it so if one sector begins to struggle, the others can support your investment.

The following are some asset classes to consider:

  • S. bonds
  • S. stocks
  • International stocks
  • Treasury Inflation Protected Securities (TIPS)

Weigh these options by how much risk you are willing to take on and your expected retirement date.

Another factor to look for in a 403(b) plan is whether your employer will match your contributions. The amount of match varies by employer, but the important thing is that some percentage of match is offered.

At Appreciation Financial, we understand that many of these technical investment terms can be confusing, and we do not expect or suggest you make important investment decisions on your own.

That is why we offer free consultations regarding the 403(b) to help you determine if it is the correct addition to your investment portfolio.

What Is the Difference Between a 403(b) Plan and a 401(k)?

There are several similarities between 403(b) and 401(k) plans, but it is important to realize that they are not the same. Though similar, the essential differences make each investment a unique strategy. Here are some of the major differences:

Who Offers Which Plan?

One of the major differences is the type of employer offering each plan. 403(b) plans are most often offered by school districts and non-profit entities, whereas 401(k) plans are usually offered by for-profit, private companies.

Employee Matches

Though some 403(b) plans offer employee matches like were mentioned in the sections above, the vast majority do not. In contrast, 401(k) plans almost always provide some type of employee match.

Catch-up Contributions

If you began saving for retirement later in life, 403(b) plans allow many tenured employees to make catch-up contributions far more significant than what is allowed with a 401(k).


403(b) plans are often administered by insurance companies, whereas 401(k) plans administrators are usually a part of mutual funds companies. Because of this, investment options in 403(b) plans are more limited.

In many cases, 403(b) plans are annuity-heavy. In contrast, 401(k) plans tend to be mutual fund heavy.

Is It Possible to Access Money In a 403(b) Account Before Retirement?

In certain situations, it is possible to access money in your 403(b) account before you retire.

That said, our team at Appreciation Financial usually recommends keeping your money in your account. Because of the penalties involved in accessing your money, it is never a smart move to dip into a retirement account for extra cash.

If you are experiencing financial hardship, reach out to our financial experts before dipping into a retirement account. In many cases, we can help you find solutions that do not involve risking your retirement funds.

Get Advice From the Experts

At Appreciation Financial, we understand that planning for retirement can be confusing and intimidating. That sentiment applies to 403(b) plans as well.

Though this article has provided a deep dive into the intricacies of 403(b) plans, you probably still have plenty of questions about whether it is the right investment opportunity for you.

Our retirement experts excel in helping teachers prepare for retirement. With pension reviews, debt solutions, and more, we offer free retirement consultations.

Have questions about 403(b) retirement plans? Call our office today for a free consultation or reach out to Appreciation Financial online.