What is a 403(b)?
A 403b plan is an employer-sponsored retirement account, similar to a 401(k). Contributions are typically made each pay period with pre-tax salary deferrals.
Who can contribute?
Any full-time employee is eligible to participate in his or her school's 403(b) plan. A common misconception is that only teachers are able to make contributions to 403(b) plans. This is not the case. Support staff, including administrative assistants, cafeteria staff, and custodians, are all able to make regular contributions to a 403(b) retirement saving account.
Why should I open a 403(b)?
Participating in your school’s 403(b) and making regular contributions does a few things. For starters, if you set up automatic deductions, you can be building wealth for retirement without even having to think about it. Secondly, making regular 403(b) contributions may have a significant impact on your annual tax situation - potentially helping you save on taxes!
Automatic Salary Deferrals
Contributions to your school's 403(b) plan occur every pay period with a salary deferral. Automatic contributions ensure that you are paying yourself first, and they also ensure that you are actually saving for retirement. The great news is that when it comes to employer-sponsored plans, a little really can go a long way in terms of retirement saving.
If you contributed $100 during every bi-weekly pay period for one year, you would have contributed $2,600 by the end of the year. That $2,600, if left in your account, will begin to generate earnings that will continue to grow tax-deferred until you start taking distributions.
Because contributions to a 403(b) plan are typically made on a pre-tax basis, money going into the plan is deducted from the employee’s salary before federal income taxes. Consequently, by lowering taxable salary, participants are able to lower their federal income tax each year they participate in the plan. Money contributed to a 403(b) account grows tax-deferred until retirement, when qualified distributions are taxed as ordinary income.
Some employers may also offer employees the option to make Roth, or after-tax contributions, to the school's 403(b) plan. With the Roth option, earnings in the 403(b) continue to grow tax-deferred, AND distributions made during retirement are also tax-free (provided the participant has reached the age of 59½ and has owned the account for five years.) The Roth options may be a good option for younger employees who anticipate their tax bracket will be higher during retirement than it is during the contribution phase.
2019 Contribution Limits
The 2019 contribution limit for employer-sponsored plans, including 401(k)s, 457s, and 403(b)s is $19,000. Additionally, if you are over age 50 you can make and additional $5,000 catch-up contribution for a total of $24,000 in tax-deferred retirement savings.
And don’t worry, you can change your contribution amount at any time. You may decide to contribute a larger amount each paycheck, or maybe you might need to pause your contributions for a while. Both can be easily can be done by filling out an salary reduction agreement.
To get started with a 403(b), contact your human resources department, or give my office a call. Luckily, the application process for most 403(b)s is pretty straightforward. But if you want to sit down with someone to talk over the details of the plan, or have other retirement planning questions, Personal Financial Strategies can help with that too.
Have questions? Let's Talk.
This information is not intended to be a substitute for specific individualized tax advice. Tax services are not offered by Personal Financial Strategies, LPL Financial or affiliated advisors. We suggest that you discuss your specific tax issues with a qualified advisor.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
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