29 Jul What is a 403(b) Retirement Plan?
If you’ve spent time researching retirement plans, you might have come across a 403(b) plan. But what is a 403(b) plan? How does it differ from a 401(k) plan? Are you eligible for one? And why would you want one? Our team at Appreciation Financial hopes to answer these questions, and help you decide if a 403(b) retirement plan is right for you.
What is a 403(b) retirement plan?
A 403(b) retirement plan is also known as a Tax-Sheltered Annuity or TSA-plan. Employees and their employers can contribute to these plans as they normally would with a 401(k). Employer participation in contributions may vary from district to district. The 403(b) plan allows for pre-tax contributions, and the maximum contribution limit in 2020 is $19,500 (proportional to the annual cost of living), just as with the 401(k). That’s how a 403(b) and 401(k) are similar, but how are they different?
What’s the difference between a 403(b) and 401(k)?
Though there are other, more subtle differences, the main difference is this: unlike the 401(k), the 403(b) plan is only offered to the employees of 501(c)(3) tax-exempt organizations. Some examples are public schools, co-op hospitals and government agencies. Those employees might also be able to contribute to a 401(k), but employees of for-profit organizations may not invest in a 403(b).
Am I eligible for a 403(b)?
Chances are, if your employer isn’t offering you a 403(b), then you’re not eligible for one. That’s because the administrative costs of the 403(b) are much lower than that of the 401(k). If you’re an employee involved in the day-to-day operations of a public school (i.e., teacher or school administrator) then you’re eligible. If you’re not sure whether you qualify, the best thing to do is ask your employer.
What are the advantages of a 403(b)?
- You won’t pay income tax on retirement contributions or revenue generated by your retirement savings until you start making qualified withdrawals. You are still subject to the 10% penalty if you begin withdrawing from your retirement before age 59 1/2.
- 403(b) plans tend to have shorter vesting schedules than 401(k) plans. This means the money in the account is 100% yours sooner.
- 403(b) plans have the same maximum contribution limit as a 401(k) but there’s an exception to that—if you’ve served 15 years or more in your current position, you can contribute an additional $3,000 annually.
What are the disadvantages of a 403(b)?
- Your employer isn’t required to contribute to your retirement with a 403(b). Retirement plans that don’t have employer matching aren’t subject to the regulations of the Employee Retirement Income Securities Act. This means that you’ll save on some administrative fees.
- If your 403(b) isn’t subject to ERISA regulations it means you may not be protected from creditors dipping into your retirement to collect their debts.
- Investment diversification is more limited than a 401(k), which means growth rates can be flatter. 403(b) investments typically focus on annuities—while less volatile than stock dividends (401(k) growth engine), they don’t tend to generate as much wealth.
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So to summarize, a 403(b) retirement plan is this:
- It’s for employees of public, not-for-profit, charitable organizations (like teachers)
- It presents less tax-burden to the employee than other retirement plans
- It’s a slow-and-steady wealth generator
Need help deciding if a 403(b) is the right retirement plan for you? Talk to one of our certified Appreciation Financial agents today!