While many people are more familiar with the term 401(k), 403(b) accounts are very similar and have some unique features. In fact, the main difference is the IRS code governing for-profit business retirement plans is in Section 401(k) while the Section 403(b) covers retirement plans for non-profit entities like schools, churches and hospitals.
403(b) plans allow eligible employees to make voluntary contributions to an approved provider for the plan. This can be either an investment firm or an insurance company. An employee under the age of 50 can contribute up to $20,500 for 2022. If a participant is 50 or older, that person can contribute an additional $6,500 “catch-up”, totaling up to $27,000 for 2022. These contribution limits are the maximums that can be contributed, but participants can contribute any amount to fit an employee’s individual needs and budget.
All of the funds contributed by the employee to the account are 100% owned by the employee. If the employer matches contributions, there may be a vesting schedule, but your contributions are always 100% yours.
In a traditional 403(b) plan, your contributions are made pre-tax and grow tax deferred as long as they remain in the account. Therefore, contributing to a 403(b) can be a method to reduce your current tax liability.
Similar to a 401(k), there are provisions for withdrawals from a 403(b). If you are under age 59 ½, a normal distribution can incur an IRS penalty of 10%. However, there may be provisions for hardship distributions. Also, you may be able to borrow up to 50% of your account balance for emergency needs. Be aware that not all plans have these provisions. Please check with your human resources contact to find out what your plan allows.
Depending on the investments or annuity chosen by the participant, the account can potentially earn a growth rate of return on the funds invested. Because of compounding growth, even small contributions over the long term can potentially become a meaningful part of a participant’s retirement assets. The employee is the ultimate decision-maker for investing the funds, so take the time to learn more about the different investment options and consider hiring a financial advisor. Some advisors have a fiduciary duty to their clients and must act in the client’s best interest.
In summary, a 403(b) plan allows educators, medical professionals and faith leaders to contribute to their retirement in a tax advantaged account that they control and own. While there are risks and costs associated with any investment or insurance product, these plans can provide significant strength to your retirement savings plan.
Going forward, I’ll be writing more about the benefits and risks of this and other retirement accounts. I hope you find it helpful. If you have any specific questions, please contact me.