If you work for a nonprofit, church, or public school, a 403(b) plan is a great way to save for retirement

A 403(b) retirement plan is a tax-advantaged account for some nonprofit and public-sector workers. Thomas Barwick/Getty Images
  • A 403(b) retirement plan can only be used by employees of public schools, churches, hospitals, or other tax-exempt organisations.
  • As with a 401(k), you won’t pay income tax on the money that you contribute to a 403(b) retirement plan, unless you choose to make Roth contributions.
  • While 403(b) and 401(k) plans share many of the same benefits and limits, 403(b) plans can be more affordable, at times, and may allow you to make extra contributions after you’ve worked for your employer at least 15 years.
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When it comes to retirement savings, it’s a good idea to take advantage of tax-advantaged retirement accounts. You may be familiar with traditional and Roth IRA accounts as well as employer-sponsored 401(k) plans. But there’s another type of employer-sponsored plan, called the 403(b) retirement plan, that you may be less familiar with.

But if you work for a public school or nonprofit organisation, this may be the type of retirement plan that you’re offered. In this quick guide, we’ll explain what 403(b) retirement plans are, how they work, and how they compare to 401(k) retirement plans.

What is a 403(b) retirement plan?

Also called a tax-sheltered annuity (TSA), a 403(b) is a retirement plan that can only be used by public schools and tax-exempt organisations. Teachers, ministers, and employees of cooperative hospitals and nonprofit organisations are just a few people who may be eligible to participate in a 403(b) retirement plan.

Like a 401(k), contributions made to a 403(b) retirement plan are tax-deferred. That means any contributions you make to your 403(b) plan will reduce your taxable income for a given tax year. You won’t have to pay tax on your contributions or earnings until you make withdrawals in retirement.

If available, you could choose to make Roth contributions to your 403(b) retirement plan instead. In that case, you’d pay income tax up front, but your retirement withdrawals would be tax-free.

You can contribute to your 403(b) plan yourself (called an elective deferral) and your employer can contribute as well via a matching program or some other means.

As of 2019, you can contribute up to $US19,000 per year of your own money to your 403(b) plan. The maximum that an employee and employer can contribute together is $US56,000. If you’re over 50, though, you can make up to $US6,000 of catch-up contributions per year.

As with a 401(k), you can begin taking 403(b) plan disbursals once you reach age 59 1/2. But if you withdraw from your 403(b) any earlier than that, you’ll generally be charged a 10% penalty.

What’s the difference between a 401(k) and a 403(b) retirement plan?

403(b) and 401(k) plans are very similar in most regards. In general, they share the same contribution and withdrawal limits and tax treatment. But there are a couple of reasons why a 403(b) may be a better choice.

For one, 403(b) plans that don’t offer employer matches may not require ERISA oversight (Employee Retirement Income Security Act), which can cause their administrative costs to be more affordable.

Second, some 403(b) plans allow employees who’ve worked for at least 15 years to contribute extra money to the plan each year, up to a $US15,000 lifetime max.

In most cases, your employer won’t offer both types of plans. Generally, they will only offer one or the other.

Are 403(b) retirement plans a good choice?

If your employer offers a match, your 403(b) plan should probably be the first place that you save for retirement. That’s free money that you don’t want to leave on the table.

However, if you’re not offered a match, you’ll want to make sure that your organisation’s 403(b) plan is affordable. If your employer’s plan has high administrative costs, you may want to contribute to a personal IRA first. Once you’ve maxed out a traditional or Roth IRA, you can always circle back to your 403(b) retirement plan.

Another thing to consider is investment options. Like 401(k)s, many 403(b) plans only give employees a limited menu of investments to choose from. Is having unlimited investment choices important to you? If so, that’s another reason you may want to have your own IRA with a discount broker or robo-adviser in addition to your employer-sponsored 403(b) plan.

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