What is a 403(b) Plan

A 403(b) plan is closely linked to the well-known 401(k) plan, but it is a retirement account built for employees of tax-exempt organizations (non-profit organizations) or educational institutions. The employees who have access to this retirement account include:  

  • Employees of 501(c)(3) tax-exempt organizations 
  • Employees at state institutions, universities, and public schools 
  • Church employees 
  • Ministers and clergy members 
  • Employees of Indian tribal government working in public schools 

The 403(b) plan, which enables members to save money for retirement through payroll deductions while taking advantage of specific tax benefits. Unlike a 401k plan, which is always subject to ERISA (employee retirement income security act), 403(b)’s may be ERISA or non-ERISA plans. If there are employer contributions, or the employer restricts choice, it may be an ERISA plan (with the exception of church plans). It is important for investors to remember that the Internal Revenue Service (IRS) has imposed contribution caps. 

Contribution Limits:

The annual contribution limitations associated with 401(k) plans also apply to the 403(b) plan. The maximum that can be contributed is: 

  • $23,000 in 2024 

A $7,500 annual catch-up payment is available to those 50 years or older. The maximum amount that can be contributed by both the employer and the employee combined is: 

  • $69,000 in 2024 (or 76,500 for employees over age 50) 

Now what is unique to some 403b planis is the 15-year catch-up provision. If an employee has been working for the same eligible 403(b) employer for 15 years or more, they can make additional catch-up contributions. Specifically: 

Before withdrawing funds, participants must be at least 59½ years old, or they will be subject to an early withdrawal penalty. 

What are the Types of 403(b) Plans? 

The 403(b) plan can be broadly classified into two versions: Pre-Tax, or Traditional 403(b)’s or Roth 403(b)s. Not all plans allow employees access to the Roth version. 

Traditional 403(b):

Pre-tax contributions can be made into an account by the employee and automatically deducted from each paycheck. 

Roth 403(b):

A Roth 403(b) requires that after-tax money be deposited into the retirement account. There is no immediate tax advantage. However, when the money is withdrawn, the employee will not owe any further taxes on it or the profit earned from it, when held for at least five years and withdrawn after age 59 ½. 

The Pros and Cons 

Pros: 

  • Traditional 403(b) plans provide for tax-deferred earnings and returns until withdrawal. 
  • Many 403(b) plans vest funds over shorter periods, but some vest instantly. 
  • Employees who have 15 or more years of service can make additional catch-up contributions. 
  • Another great way to also accumulate Roth funds too. 

Cons:

  • Withdrawals before age 59½ carry a 10% tax penalty. 
  • Plans may offer narrower investment choices than other plans 
  • Pay close attention to fees and features, such as loan provisions 
  • Many older accounts are held in expensive annuity contracts with limited choice 

Universal Availability Rule 

The “universal availability rule” means that if an employer permits one employee to defer salary into a 403(b) plan, the employer must extend this offer to all employees of the organization. The employer may exclude certain employees from the plan: 

  • Employees who will contribute $200 or less annually 
  • Those employees who participate in a 401(k) or 457(b) plan or in another 403(b) plan of the employer 
  • Nonresident aliens 
  • Employees who normally work less than 20 hours per week 
  • Students performing services described in IRC Section 3121(b)(10) 

The Takeaway: 

The 403(b) retirement plan stands as a pivotal tool for employees in public education organizations, certain non-profit employers, and ministers to bolster their retirement savings. With its tax-advantaged status, the 403(b) plan encourages participants to save consistently over the course of their careers, offering them a means to grow their investments in a tax-deferred environment. Furthermore, it provides various investment options tailored to meet individual financial goals and risk tolerances. As the landscape of retirement planning continues to evolve, the 403(b) plan remains a cornerstone for those seeking to secure their financial future, emphasizing the importance of early and informed investing decisions. Through careful planning and regular contributions, participants can look forward to a retirement period marked by financial stability and peace of mind. 


If you or your organization are eligible for a 403(b), we are happy to assist! 

 

Asset Strategy offers Institutional Retirement Consulting services that help participants achieve financial confidence while protecting plan fiduciaries from liability. 

 

Visit our page: https://assetstrategy.com/retirement-plan-consulting/ or contact us at 781-235-4426 for any questions. 

 

 

This article was written in reference to: 

https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans 

https://www.investopedia.com/terms/1/403bplan.asp 

 


 

 

 

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