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 for-profit company counterpart, the 401(k) plan, with important differences.
If you're considering enrolling in a 403(b) plan, check out the benefits below.
- Much like 401(k) plans in the for-profit sector, 403(b) retirement plans for employees of nonprofit organizations.
- If your employer offers it as an option, you may be able to invest in a Roth 403(b) account, where you'll get no upfront tax break, but your withdrawals in retirement will be tax-free.
- A feature unique to 403(b) plans allows some employees with 15 years of service at the same employer to make extra contributions.
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 salary and goes directly into the 403(b) plan, untaxed. This cuts down on your income tax owed 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 make pretax contributions to a traditional 403(b) plan, you don't pay taxes on your earnings until you take distributions after you retire. And remember, most people fall into a lower tax bracket after retirement.
As with a 401(k), with a 403(b), you don't have to pay taxes on dividends, interest, or capital gains until you withdraw that money (and sometimes not even then). Compare that to holding your retirement investments in a taxable bank or brokerage account, the earnings of which are taxed every year.
You can also rebalance your portfolio without losing much—except potential trading fees. And because the tax efficiency of your mutual funds aren't a concern, you can concentrate your portfolio on high returns and low expenses.
Notably, since 2006, Roth contributions to 403(b) plans have been no problem with employers. While contributions to a Roth 403(b) aren't eligible for tax deductions, when you withdrawal from the Roth part of your plan, that's not taxable either.
Top 9 Benefits Of A 403(b) Plan
Matching Contributions and Access to Low-Cost Funds
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.
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.
Many financial advisors caution against borrowing from your 403(b) account because it leaves less money invested for your retirement—and even though you repay it, you've lost time in which the funds could have been compounding.
Higher Contribution Limits and Additional Contributions
You can set aside up to $19,000 in a 403(b) in 2019. For those 50 or older, there are additional catch-up contribution options of up to $6,000—for a total of $25,000. Compare that to the traditional IRA limits: $6,000 in 2019, with a $1,000 catch-up contribution, for a maximum of $7,000.
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.)
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 some heavy IRS penalties for early withdrawal and for missing loan payments.