Saving for Retirement With a 403(b) Plan

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by Advice Chaser
by Advice Chaser
white and gold ceramic unicorn figurine near coins

Most financial advice on retirement addresses 401(k)s or IRAs. But what if you have a 403(b) retirement fund? Teachers, librarians, and government employees often have this type of account through their work. A fifth of American workers have a 403(b) plan!

While 403(b) plans are similar in most ways to 401(k)s, there are a few key differences. If you have a choice between a 401(k) and a 403(b), you’ll need to weigh the advantages of each to decide where to invest your money.

Similarities Between a 403(b) Plan and a 401(k) Plan

Both 401(k)s and 403(b)s are tax-advantaged investment funds for retirement savings. A traditional 401(k) or 403(b) is tax-deferred, meaning that you can contribute to it with pre-tax income. But, when you take distributions from your traditional plan, you’ll pay income tax on that money.

Roth 401(k) and 403(b) contributions are funded with post-tax income. You pay tax ahead of time on money saved in the plan, but pay no tax on distributions out of the fund when you’re retired. This is often a smart option, and luckily 403(b)s exist in this form.

Both types of plan have the same contribution limits: at this writing, the limit is $19,500 for individuals and a maximum of $58,000 for combined contributions between the individual and the employer. If you have both a 401(k) and a 403(b), you can spread your maximum contributions between the two plans. After you turn 50, you can make an extra catch-up contribution each year with either type of plan.

Unique Traits of a 403(b) Plan

The most noticeable difference between the two types of plan is that 403(b)s allow you extra catch-up contributions. If you have worked for the same employer for 15 years, you may contribute an additional amount each year to your 403(b)—a maximum of $3000, depending on how long you have worked for the organization and how much you’ve contributed so far.

The next important difference benefits your employer more than you. If your employer doesn’t make any contributions to your 403(b) plan, it is exempt from many of the ERISA standards that regulate 401(k)s. That means your employer doesn’t have to do nondiscrimination testing yearly or several other administrative tasks. This saves administrative expense, which could make your 403(b) fees lower. However, since this exemption only applies to 403(b)s with no employer contributions, it’s much less likely that your employer will contribute to your plan.

If your 403(b) plan is exempt from federal standards, it’s a good idea to take a hard look at the kinds of investments involved. Many plan offer mutual funds or diversified stocks and bonds. But if yours consists of mostly annuities, insurance, or complicated products you don’t understand, it might be a good idea to seek advice before investing.

Lastly, the funds in 403(b) plans often vest sooner. This means that you gain non-forfeitable rights to the money in the fund, including employer matches. A 401(k) may vest after three to five years, but some 403(b) plans vest sooner, or even immediately. Find out the vesting period for the plan your employer offers before signing up. 

So What Should You Choose?

If you have a choice between a 403(b) and a 401(k), there’s no one right answer. If the investments available in the 403(b) look good, and especially if it offers employer matching, it could be a great option. But if the options don’t measure up to what you could get from a 401(k) or IRA, you should consider your other options.

A financial advisor can look at the plans available to you and show you the pros and cons of each. Contact us to be connected with someone who can help you make this important decision.

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