What You Should Know About 403(b) Retirement Plans
Tax-exempt, nonprofit organizations often offer 403(b) retirement plans in lieu of or in addition to different retirement account options such as IRAs or 401(k)s. 403(b) retirement plans have benefits and drawbacks compared to other types of plans. Here’s some information you should know if your employer offers a 403(b) plan.
403(b) Plans: The Basics
Employees of public schools and tax-exempt organizations can participate in a 403(b) plan. Beneficiaries include many school administrators, teachers, government employees, professors, librarians, doctors, nurses, and ministers or priests. Churches often have special plans called 403(b)(9)s.
A 403(b) plan offers tax breaks to help you increase your retirement savings, and it usually includes several options for investments. Like a 401(k), contributions to you 403(b) come directly from your paycheck. You can contribute up to $19,500 per year, and you can add an additional $6,500 if you’re 50 or older. The sum of employee and employer contributions must be less than $57,000 per year or 100% of the employee’s salary for the most recent year.
A Roth 403(b) uses post-tax funds. However, participants still need to reach age 59 ½ to withdraw their money without incurring a penalty. You must also receive Required Minimum Distributions or RMDs after age 70 1/2. Most organizations offer either a 401(k) or a 403(b), but some offer both options to their employees. In this situation, you can contribute to both plans or just one. However, your total contribution must be less than the $19,500 limit. Any 401(k) catch-up contributions won’t reduce your contribution limit.
403(b)s serve tax-exempt organizations and employees of public schools instead of private-sector workers, but they’re like 401(k)s in many other ways. After you become vested in your 403(b) plan, you can roll all of your money over into an IRA account when you change jobs. However, if you’re not vested, you can’t keep your employer’s contributions.
Some employers require a rollover when an employee stops working, and others will let you keep your money in your 403(b) as long as a minimum balance stays in the account. Your organization’s human resources representative can let you know about your 403(b)’s rules or help you get in touch with a person who can.
The Benefits of a 403(b) Plan
With a 403(b) plan, you can enjoy many different benefits. You won’t have to pay taxes on any of your earnings until you make a withdrawal. A Roth 403(b) plan produces tax-deferred earnings, as well, if the withdrawals are qualified distributions that follow relevant rules. Many employers offer matching contributions to 403(b)s, making this account an excellent way for organizations to attract skilled workers. However, matching employee contributions can increase costs for employers.
A 403(b) that doesn’t get matching contributions also won’t need to meet the strict requirements of the Employee Retirement Income Security Act (ERISA). Administrative fees could be lower than the ones for plans that get more oversight. Many 403(b) plans will vest your funds sooner than a typical 401(k). Some 403(b) plans even allow immediate vesting.
If you have over 15 years of service with some government agencies or nonprofits, you could be able to make more catch-up contributions than the contributions permitted under a 401(k). You can contribute an extra $3,000 per year, and the lifetime limit for catch-up contributions is $15,000. Unlike most other retirement plans, you won’t need to wait until you turn 50 to take advantage of this benefit. If you leave your employer, you can use your 403(b) plan before retirement in some circumstances.
The Disadvantages of a 403b Plan
Like a 401(k), the IRS imposes a 10% tax penalty on any funds withdrawn from a 403(b) before you become 59 ½. You can avoid this penalty if you stop working for the employer that runs your 403(b) when you are 55 or older. You can also get an exemption if you become disabled or if you need to pay for qualified medical expenses.
Many 403(b)s don’t offer as many investment choices as other types of retirement plans. Mutual fund companies administer most 401(k)s, and they often provide lots of options. However, most 403(b) plans have at least a few mutual fund choices. In many cases, they’re part of a variable annuity contract. Mutual funds and fixed or variable contracts are the only kinds of investments that 403(b) plans permit. You can’t use this type of plan to invest in stocks, real estate investment trusts, or other securities.
If a 403(b) plan doesn’t have ERISA protection, creditors could access the funds in your account more easily. Non-ERISA 403(b)s are also exempt from nondiscrimination testing. Plans normally get these tests yearly to help keep management or highly paid employees from getting a disproportionate amount of benefits. Without ERISA protection, the plan doesn’t need to follow the same stringent standards to ensure the safety of funds.
Tips for Investing in Your 403(b) Effectively
Many employers will match your contributions up to a percentage of your salary. You can take advantage of free money by placing at least the maximum amount your employer will match in your account. When you receive a raise, increase your contribution. If you have debt, you can decrease your contribution instead. Then, you can use that money to pay off your debt faster. After you pay your bills, you should increase your contributions again.
Choosing Between Risky and Conservative Investments
Monitoring changes in your account is a good idea, but you should remember that most changes are temporary. You can usually recoup any losses when the market becomes more favorable. Since they’ll have less time to recover from a loss, many people adjust their portfolios to less risky options as they get closer to retirement. You can usually make changes through your organization’s human resources representative. A financial advisor could be helpful as well.
403(b)s vs. IRAs
An IRA can let you save additional money for retirement. Employers sponsor 403(b) plans, but individuals must open and fund IRAs. Employers don’t contribute to IRAs, and they have different contribution limits. You can add up to $6,000 per year to an IRA, and the amount increases to $7,000 per year if you’re 50 or older.
IRAs usually offer more investment options than 403(b)s, but you may not get much advice on how to manage your money. The fiduciaries who manage 403(b) plans have a legal duty to offer investment options that match the best interests of the account owners.
A 403(b) plan could benefit your organization and its employees. Contact Human Interest for more information about a low-cost plan for your nonprofit.
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