What's a 403(b) Retirement Plan?

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photo credit: Unsplash/Peter Zagar

You just got a great new job and the retirement package includes something called a 403(b) plan — you may have heard of a 401(k), but what exactly is a 403(b)? Discover how it is different and what you can do to make the most of it.

What is a 403(b)?

A 403(b) is similar to a 401(k) plan. In fact, the only real difference is the type of employer who offers it. A 403(b) only is available to employees of certain nonprofit organizations, schools and religious institutions, whereas a 401(k) is offered by for-profit companies. Just like a 401(k), a 403(b) is a tax-deferred retirement plan, which means that you do not pay taxes on your contributions at the time you contribute, but you will pay taxes when you withdraw the money.

Just like the 401(k), a 403(b) is named for the section of the Internal Revenue Service (IRS) tax code that created it.

Who Offers 403(b) Plans?

Only tax-exempt 501(c)(3) organizations can offer 403(b) plans. So if you are entering a career as a teacher or school administrator, librarian, researcher, doctor, nurse, clergy or nonprofit professional, you may have a 403(b) as part of your benefits package.

Taxes and Withdrawals

Contributions to your 403(b) come out of your paycheck before taxes. Your employer will take out a portion of each paycheck based on how much you tell them (on a salary reduction agreement form). You can choose a set amount of money ($50) or a percentage (3 percent) of each paycheck. You can change the amount you contribute to your 403(b), so don’t worry if you are unsure about the amount when you first start your job.

Just like any retirement plan, the idea is for you to keep your money in your 403(b) account for a long time — like 30 or 40 years — until you are ready to retire. When you start to take money out of your 403(b), these payouts are taxed the same as any other income.

If you decide you need to access the money in your 403(b) before you reach retirement age, you can take money out, but you will pay penalties and taxes so the amount you receive today will be significantly lower than if you wait until you retire.

Make the Most of Your 403(b)

You have two choices to make about your 403(b): how much to contribute and what to invest in. Some employers offer to match your contribution, which means that if you put in 3 percent, they will match your contribution and put in another 3 percent. You might think of your employer’s matching amount as free money, so it makes sense to contribute up to the full amount of the match.

Whether you have a 403(b), 401(k), Individual Retirement Account (IRA) or Roth IRA the earlier you invest, the longer your money has to grow. The longer your money is in the account, the more interest you earn on your investment. So, the best way to make any retirement plan work is to invest as much as you can as early as you can.

An investment firm will manage your 403(b) account, but you get to choose your level of involvement. If you’re feeling adventurous, you can roll up your sleeves and research the mutual funds and annuities offered in your plan or you can choose a more hands-off approach such as a target date fund. A target date fund automatically adjusts investments to be more risky early on, which means chances of bigger gains now, and then switches to less risky investments the closer you get to the target date (the year you plan to retire).

Not every employer offers a 403(b) or 401(k) plan, so if you have the opportunity, it is wise to take advantage of it.

As always, we’ve got your back. – The OYO Team

[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by On Your Own, the National Endowment for Financial Education or any of its affiliate programs.]