403b Plan Basics
A 403b plan is a type of retirement plan. It is available to only certain types of employees and is similar to 401k plans. In this article, we will go over the basics of how a 403b plan works and what one can do for you.
A 403b plan is only available to employees of public schools and tax-exempt organizations. This includes, but is not limited to, teachers, school administrators, professors, government employees, doctors, nurses, librarians, ministers and clergy members, and church employees.
Types of 403b Plans
There are two types of 403b plans, traditional and Roth. Traditional 403bs are the most common. With a traditional 403b plan, you make a pretax deduction from your paycheck. You do not pay taxes on these funds until you withdrawal from your 403b. On the other hand, you fund a Roth 403b with money you have already paid taxes on. Because you prepaid taxes on these contributions, you will be able to make tax-free withdrawals. It is very rare that employers offer Roth 403b plans.
If you qualify for a 403b plan your employee contributions are made through payroll deductions. For the 2020 tax year, you can contribute up to $20,500. If you are 50 or older, you can contribute an additional $6,500 catchup contribution amount. Additionally, if both you and your employer are contributing to your 403b plan, the total contributions are capped at $61,000 or 100% of your most recent salary, whichever is less.
Advantages and Disadvantages
As with all financial tools, a 403b has both advantages and disadvantages. The main advantage is a 403b plan allows you to simultaneously save for retirement and reduce your taxable income. All gains and dividends generated are tax-deferred until the funds are withdrawn. Additionally, 403bs tend to have lower administrative costs than 401ks do. 403bs also tend to vest over a shorter period than 401ks. The last advantage is for those who have been employed with a qualifying company for 15 or more years. Once you hit the 15-year mark, you can contribute an additional $3,000 a year to your 403b. There is a lifetime limit of $15,000 for these additional contributions. Employees of any age can take advantage of these contributions if they meet the employment requirements.
The disadvantages of like those of many other retirement accounts. First, if you withdraw funds from your 403b before you are 59 ½ you will have to pay a 10% early withdrawal penalty. Second, a 403b plan may offer a smaller choice of investment options than other types of plans do.
Setting Up a 403b Plan
If you work for a qualifying employer, contact the proper department to set up your 403b plan contributions.
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