Understanding 403(B) Plans – A Retirement Planning Primer by Michael Osland

A 403(b) plan is a special tax-sheltered annuity (TSA) plan intended for employees of organizations that are exempt from income tax, such as churches, public educational institutions, hospitals, etc. Under the scope of this plan, employees can request their employer to defer a part of their pay and transfer it to this account so that they are not subject to income tax until the money is withdrawn by them at a later date.

How Does the Plan Work?

When your earnings are deferred to a 403(b) plan, you have the choice of having the money invested in investments of varying risk profiles very similar to that under a 401(k) plan. It is better that you balance your investment portfolio in the plan with a proper mix of safe and risky investments. After you have vested in the plan, if you change jobs, you are allowed to take the money but you may need to transfer it to an IRA account. In case, you are not vested, you will lose the amount contributed by your employer but can retain the money contributed by you personally.

Differences of 403(b) Plans with 401(k) Plans

The 403(b) is offered by tax-exempt organizations and typically employers match the contributions of the employees while the 401(k) is by for-profit companies and employers are only allowed to match employee contributions in compliance with rules under ERISA. The investment options under 403(b) are restricted to mutual funds and annuities while 401(k) permits stocks and bonds too in addition to annuities and mutual funds. The best plans offer a choice of low-cost investment options, according to https://www.forbes.com.

Benefits of 403(b) Plans

Employers benefit from a 403(b) plan by using it to attract and retain quality employees by offering matching contributions. Companies are permitted to match the contributions made by employees under a 403(b) plan on the first 5% of their payroll on a dollar-for-dollar basis. There are quite a few attractions for employees such as the non-taxability of the contributed amounts until their distribution, which allows them to grow their wealth faster for many decades. It is also possible for elective deferrals to your 403(b) account to be eligible for a tax credit. In an emergency, account holders can take loans against their plans but they must be repaid to avoid stiff taxes, cautions Michael Osland.

Optimal Contribution to a 403(b)

Employees should aim to save around 15% of their incomes towards retirement planning every year, including the contribution made by your employers. If your employer offers a matching contribution, you should always try to take advantage of it, because essentially, it is money for free. If possible, you should consider investing the maximum amount that your employer offers to match taking care to keep increasing the amount in line with the raises. Thereafter, you can achieve the limit of your IRA contributions, and then if you still have money to invest, you can revisit your 403(b) till you get to your 15% goal.

Conclusion Michael Osland

If you work in a non-profit, you should contribute to a 403(b) plan because your money is not subject to tax till you withdraw it, and you can make your wealth grow faster