When it comes to retirement planning, you’re probably pretty familiar with one IRS tax code reference in particular: the 401(k) retirement plan.
However, if you are a teacher or a professional who works at a school, college, or similar organization, there is another retirement planning tool that you should become very familiar with: the 403(b) plan.
Not quite sure what a 403(b) is or how one can make a difference in your personal financial planning?
In this article, we give you the information you need and lay out our top four reasons why we think every teacher should consider a 403(b) plan.
What is a 403(b) plan?
Like their tax code relative, 403(b) plans are retirement tools offered by employers to their employees. However, the scope of a 403(b) is much more narrow; in this case, the employers are public educational institutions, including public schools, colleges, and universities as well as certain nonprofits, churches, and church-related organizations.
Similar to a 401(k), a 403(b) is a pre-tax (unless a Roth plan is selected) way of contributing money toward your retirement. This means the money you save and the investment gains grow tax-free until you reach retirement age, which is often a time when one’s tax liability is lower than when they are working.
Why should you take advantage of the 403(b) plan?
There are many reasons why saving for retirement is a smart personal financial planning strategy—but here are four reasons a 403(b) may be a particularly good idea.
1. Your employer likely will match a percentage of your contributions.
One of the biggest advantages is what many informally refer to as “free money.”
Although the percentage may vary from plan to plan, the idea is that for every dollar you put in from your income, your employer will automatically match it with a similar contribution. This advantage alone can make participation in a 403(b) hard to pass up, even if you only participate enough to reach the employer match and then use other savings tools for your retirement planning.
2. You can choose your investment type.
You have likely heard of the value of diversification, which is important to help savers find a retirement planning strategy that fits their risk profile and savings goals.
Plan options can vary widely, but most 403(b) administrators offer a range of mutual funds, exchange traded funds, and annuities to choose to allocate your contributions to. Some plans may also offer the ability to choose a Roth investment plan, which utilizes after-tax contributions, meaning your contributions and the related gains are taxable now instead of when they are disbursed. This can be a valuable investment strategy if you believe your tax liability will be higher later in your retirement.
3. You can save up to $18,000 per year.
Although this limit may be out of the reach for most savers, this higher contribution limit for non-Roth investment accounts can make a big difference for those who are toward the end of their careers or who have employer matches.
In addition to boosting your progress toward your retirement savings goals, there is an immediate reduction of the saver’s taxable income—up to $18,000 less—which is a great way to lower the amount of taxes you owe each year.
However, it is important to remember that no matter how much you save, you are making a worthwhile investment in your retirement. Adding $50 a month for 30 years could grow to $150,000 by the time you retire. This is a hypothetical example for illustrative purposes only. Actual results may vary.
4. You have more vesting options.
Because 401(k) plans are offered to private sector employees, they typically have longer vesting periods than 403(b) plans, which often offer immediate vesting or short waiting periods. This means your contributions, your employer matches, and your investment gains can more quickly be locked in, allowing you to move your plan with you to another employer so you can keep your saving momentum going.
Is a 403(b) right for you?
A 403(b) can be a powerful tool to help accelerate teachers and their families toward their savings goals—if it’s the right retirement planning tool for them.
If you have questions about if you should invest in a 403(b) plan and, if so, which investment choices are best for you, the team at HWG would love to meet with you and talk about your options.
Click here to schedule your own personalized consultation. While you are at it, we also welcome you to make use of our free checklist, “The 3 Pillars of Successful Retirement Plans.”
About the Author
Garrett German* founded Harvest Wealth Group with the aim to create a meaningful experience that will impact his clients, in a significant way, both personally and financially. After your first meeting with our team, you’ll be on your way to financial clarity and confidence.