403(b) plan

What is a 403(b) plan?

A 403(b) plan is similar to a 401(k) plan. It is designed to help people who work for nonprofits or public organizations to save for retirement.

Deeper definition

A 403(b) plan is sometimes known as a tax-sheltered annuity plan and is intended for people who work at public schools or for some types of tax-exempt organizations. Ministers also might have access to a 403(b) plan.

Similar to a 401(k) plan, a 403(b) plan can take several forms. It can be an annuity contract through an insurance company, or a custodial account that invests in mutual funds.

Like a 401(k) plan, contributions to a 403(b) plan are usually tax-deferred, meaning an employee will pay tax on the money in the account during retirement.

It is also possible for an organization to offer a Roth 403(b) plan, in which taxes are paid as contributions are made. In retirement, no additional tax is charged on the money in the plan.

Also like a 401(k) plan, there are limits on the amount you can contribute to a 403(b) plan during the course of a year. As of 2017, you are allowed to contribute up to $18,000 to a 403(b) plan per year. If you are over age 50 at the end of the year, you are allowed to contribute up to an extra $6,000 to your plan.

Additionally, you might be able to contribute an extra $3,000 to your plan per year, if you have work for the same organization or company for 15 years. To qualify for the catch-up contribution, you need to have made contributions of less than $5,000 in past years.

403(b) plan example

Let’s say that at age 35, Jane Smith got a job as a high school English teacher at Public School District B. During the first 15 years of her career at the school, she had $250 deducted from each of her monthly paychecks and deposited into her 403(b) plan. The plan invested her money in mutual funds, and she set aside $3,000 per year.

Now age 50, Jane has realized that saving just $250 per month hasn’t resulted in a very large nest egg. She decides to increase her elective deferrals, or the amount automatically taken out of her paycheck. Since she is now 50, she is able to contribute the full $18,000 per year, plus an additional $6,000, for a total of $24,000 annually. She has $2,000 taken out of each paycheck.

Do you work for a public institution or nonprofit and have access to a 403(b) plan? Find out if it’s better to contribute to a 403(b) or a Roth IRA.

 

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