Employees of companies in the private sector have 401(k) plans to help build their retirement savings. But what exactly is a 403(b) plan? If you’re a school teacher or work for a tax-exempt organization, a 403(b) plan is a tool that may help you reach your retirement goals. 403(b) retirement plans are also known as tax-sheltered (or tax-deferred) annuities.
Here are a few things to consider about the 403(b) option:
Who is eligible?
Tax-deferred 403(b) plans are designed for employees of public schools, colleges and universities, churches and other religious organizations. Employees of certain other tax-exempt, non-profit organizations such as charities or certain hospitals can also participate in a 403(b) retirement plan.
A 403(b) plan lets you set aside a portion of your salary in an employer-sponsored account to save for retirement. Some employers may also match your contribution. That’s like getting free money for participating in your retirement plan.
You don’t pay taxes on your contributions to the plan, or on any earnings the account accumulates until you withdraw the money – which ideally happens when you’re retired. And by then you may be in a lower tax bracket – so there are potential savings every step of the way.
With a 403(b) retirement plan, you can typically invest in fixed annuities, variable annuities or mutual funds. Ask your advisor to help you choose investments that best meet your retirement objectives. Also remember that investing involves market risk, including possible loss of principal, and there's no guarantee that your investment objectives will be met.
Enrolling in your employer’s 403(b) retirement plan is a big step in preparing for your future. You can start small − the important thing is that you start investing now so your money has time to potentially grow.
If your employer doesn’t offer a 403(b) plan, find out if they have another kind of retirement plan. Or ask your investment professional about other ways to start investing for retirement.
Early withdrawals – and why to avoid them
Because 403(b) plans were created to help you save for retirement, there may be harsh penalties for withdrawing money early, including:
- Income taxes on the total withdrawal
- A 10% penalty if you’re younger than 59½
- 20% federal income tax withholding – unless the entire amount is rolled over to another qualified retirement plan or IRA
Explore more of our retirement resources and start planning your financial future today.