A 403(b) plan is a tax-sheltered retirement plan for people who work for nonprofit companies, including charities, schools, and qualified religious organizations. The 403(b) plan is comparable to its private-sector counterpart, the 401(k) plan, with important differences.
If you're considering enrolling in a 403(b) plan, check out the benefits below.
- The 403(b) plan is similar to the 401(k) plan; available for private-sector employees.
- If your employer offers it as an option, you may have a choice of traditional or Roth.
- A feature unique to 403(b) plans allows some employees with 15 years of service at the same employer to make extra contributions.
Top 9 Benefits Of A 403(b) Plan
Tax-Deductible and Tax-Free
Contributions to a traditional 403(b) plan are deductible on your federal income taxes. The money comes out of your gross salary and goes directly into the 403(b) plan, untaxed.
This cuts down on the income tax you owe for that year based on your top marginal tax rate. For example, if the last $10,000 of your adjusted gross income is taxed in the 22% tax bracket, placing $10,000 into a 403(b) would save you $2,200 in taxes.
If you opt for a traditional 403(b) plan, you don't pay taxes on the money you pay until you begin making withdrawals after you retire. And remember, most people fall into a lower tax bracket after retirement.
It's important to note that you won't owe taxes on the investment growth in your account until after you retire. The money will grow tax-free until you begin making withdrawals.
You will be able to change your investment choices without losing much, except for some trading fees. And because the tax efficiency of your mutual funds isn't a concern, you can concentrate your portfolio on investments that offer high returns and low expenses.
The Roth Alternative
Since 2006, participants have also had the ability to choose a Roth rather than a traditional 403(b) plan. If you opt for a Roth, you'll pay the income taxes upfront in the year in which you contribute the money. But you'll owe no taxes on your contribution or the profits it earns when you take the money out after retiring.
If you can take the hit to your current income, this may be your best bet for building a rich retirement.
Your employer might make matching contributions to your 403(b). Some employers kick in as much as 50 cents to $1 for every dollar you contribute. Others contribute nothing.
Many financial advisors caution against borrowing from your 403(b) account because it leaves less money invested for your retirement. Even though you repay it, you've lost time in which your money could have been compounding.
In any case, a 403(b) plan can also get you a good deal on investments; often better than you could get on your own. Financial institutions have even been known to waive their minimum investment requirements, helping employees invest in low-expense institutional funds.
Contribution and Income Limits
You can set aside up to $20,500 in a 403(b) in 2022 (increasing to $22,500 in 2023). Those 50 or older can make an additional catch-up contribution of $6,500 in 2022 and $7,500 in 2023.
Notably, some 403(b) plans allow certain individuals with 15 or more years working at the same company to make additional contributions—up to $3,000, depending on the particular plan. Check with IRS Publication 571 for a closer look at the 15-year rule and how to calculate allowable contributions.
The total combined contribution limit for 403(b) plans between both the employee and employer is $61,000 or $67,500 including catch-up contributions in 2022. For 2023, the amount is $66,000, or $73,500 with the contribution limit.
For those who want to participate in a 403(b), your income cannot be more than the annual limit set by the IRS. The annual income limit in 2022 is $305,000 (increasing to $330,000 in 2023).
Sometimes it's even possible to take out a loan from your account, depending on the rules of your particular 403(b) plan. However, keep in mind that you can trigger heavy IRS penalties for early withdrawal and for missing loan payments.
How Much Can I Contribute to My 401(b) Plan in 2021?
The contribution limit for a 401(b) plan in 2022 is $20,500. This amount increases to $22,500 for 2023. Individuals who are age 50 and older have the ability to contribute an additional $6,500 in 2022 and $7,500 in 2023.
What Is the Difference Between a 401(k) Plan and a 403(b) Plan?
401(k) and 403(b) plans are both similar retirement plans for employees in that they are funded with pre-tax dollars. Both have the same annual contribution limits. The primary difference between the two is that 401(k) plans are for for-profit companies whereas 403(b) plans are for nonprofit companies.
Can You Lose Your Money in Your 403(b) Plan?
The money that you contribute to your 403(b) plan as well as the matching amounts made by your employer are yours and cannot be withheld from you.
Additionally, the risk of you losing your money due to market movements is low as investments are typically made in safe mutual funds. That being said, your account can witness swings given the market; however, losing the entire value of your account is almost impossible.
The Bottom Line
A 403(b) plan is a great retirement plan for individuals working for nonprofit organizations. It operates similarly to a 401(k) plan and comes with many benefits, such as being tax-deductible and tax-free, having the option of a Roth IRA, an employer match, and various catch-up contribution limits.