A 403(b) plan is a retirement account designed for certain employees of public schools and other tax-exempt organizations. Participants may include teachers, school administrators, government employees, church employees, and doctors.
Retirement planning is a crucial step in creating the future you desire. A 403(b) plan allows you to save for your retirement and defer taxes on those contributions until you can withdraw that money in the future.
In general, there are two types of the 403(b) plan: the traditional and the Roth. Not all employers allow employees access to the Roth version.
Traditional 403(b)
A traditional 403(b) plan allows the employee to have pretax money automatically deducted from each paycheck and invested into a personal retirement account. You’ll put away some money for the future and at the same time reduce your gross income for the year. The taxes will be due on that money only when you withdraw it.
Roth 403(b)
A Roth 403(b) requires that after-tax money be paid into the retirement account. There’s no immediate tax advantage. However, you will not owe any more taxes on that money or the profit it accrues when it is withdrawn.
403(b) plans are a valuable tool for retirement savings. You can choose the amount that you want to contribute to your plan each month, and this amount will be deducted from your paycheck automatically, with no further action needed from you! To set this up, you will simply complete a Salary Reduction Agreement (SRA) and submit it to your employer’s Third-Party Administrator.
The IRS limits the amount that employees can contribute to their 403(b) plans. The maximum contribution allowed for 2024 is $23,000. Individuals who are 50 and over can contribute an additional $7,500 each year as a catch-up contribution.
Some employers offer an additional benefit aside from simply offering the 403(b) plan itself.
If the employer offers a retirement “match” on the 403(b) plan, this means they will contribute an additional amount on top of your personal contribution. This is a huge benefit and should be taken advantage of if your employer offers it! Combined employee and employer contributions are limited to the lesser of $69,000 in 2024 or 100% of the employee’s most recent yearly salary.
Once you reach the age of 59 ½, you may withdraw your funds with no penalty! However, there are additional options to withdraw your money earlier if you meet certain requirements, such as separating from service, experiencing a qualifying financial hardship, etc.
In conclusion, 403(b) plans are a great way to save for your future!
They allow you the freedom to choose your contribution amount and have it taken out of your paycheck, tax-free, without you having to worry about it. The money will grow in a compounding interest account held by a reputable vendor that partners with your employer to provide this benefit for you.