This type of employer sponsored retirement plan is offered to education, non-profit organizations, and certain religious organizations.[1]
Key aspects of 403(b) plans:
- These are pre-tax accounts, so you lessen your tax burden in the present but will have to pay taxes when you start using the money in retirement.[2]
Unique to 403(b) plans: Employers must allow all employees to participate except those who work less than 20 hours per week, professors on sabbaticals, certain students, union employees, and non-resident aliens.[2]
- With all investment accounts, you expose some or all your invested money to loss for the chance to earn a higher profit. Investment gains hinge on an ongoing and long-term investment strategy that uses your risk tolerance and diversification to mitigate some risks. Even with these in place, you are exposing your money to loss.[3]
- Matching is not common for these types of plans. Employers often limit their role and do not provide employer contributions to the plan to remain exempt from the Employee Retirement Income Security Act (ERISA) of 1974. ERISA was established to safeguard employees who participate in employer-run retirement plans.[7],[8]
- These plans usually have lower fees, less oversight, and no annual nondiscrimination tests (NDTs) since those costs don’t need to be offset.6
- The vesting schedule is often much shorter than 401(k) plans.2
- Investment options are only Mutual funds and annuities.2
- If you leave an employer, you can take your money with you.[9]
- Profit-sharing, where a company offers stock options to its employees, is not available with these types of plans since these organizations are non-profit.6
- The earliest you can take penalty-free withdrawals is 59 ½; the penalty is an extra 10% on top of the taxes collected. However, there are some exemptions to the early withdrawal penalty- if you are permanently and totally disabled, if you lose your job at 55 or older, if you have medical expenses that exceed 10% of your modified adjusted gross income, with some divorce settlement types and if you die.8
- You can take a low-interest loan on 403(b) accounts, up to $50,000 or 50% of your account balance. You can take out the full amount if your balance is $10,000 or less. You will have to repay the loan within five years (this period may be extended if the money is used to buy a primary home) or upon leaving that job, or it becomes taxable income. The payments will most likely be held back from your paycheck.[11]
If you want to explore investment accounts that would work for your personal or retirement goals, Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here. To sign up for our weekly newsletter with the latest economic news, click here.
Sources:
[1] https://www.fool.com/retirement/plans/401k/401k-vs-403b/
[2] https://www.rbcwm-usa.com/resources/file-687824.pdf
[3] https://www.investor.gov/sites/investorgov/files/2019-02/Saving-and-Investing.pdf
[4] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-403b-contribution-limits
[5] https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-an-employee-making-a-15-years-of-service-catch-up-contribution-doesnt-have-the-required-15-years-of-full-time-service-with-the-same-employer
[6] https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000#:~:text=Highlights%20of%20changes%20for%202024,to%20%247%2C000%2C%20up%20from%20%246%2C500.
[7] https://www.fool.com/retirement/plans/401k/401k-vs-403b/
[8] https://www.investopedia.com/terms/e/erisa.asp
[9] https://www.fool.com/retirement/plans/403b/withdrawal/
[10] https://www.tiaa.org/public/support/faqs/required-minimum-distributions
[11] https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp
https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp
This material has been prepared for informational purposes. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances.