What is a 403(b)? – Retirement for Non-Profits and Educators

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May 02, 2023

What is a 403(b)? – Retirement for Non-Profits and Educators

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If you work for a non-profit organization or a public school, college, or university, you may have heard of a retirement savings plan called a 403(b). A 403(b) plan is a tax-advantaged way to save for retirement, similar to a 401(k) plan, but specifically designed for employees of certain non-profit organizations and educational institutions.

By contributing to a 403(b) plan, you can reduce your taxable income, potentially earn a higher return on your investments, and build a source of retirement income that can help you maintain your standard of living in retirement.

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What is a 403(b)?

A 403(b) is a retirement savings plan that is available to employees of certain non-profit organizations, as well as employees of public schools, colleges, and universities. It is similar to a 401(k) plan but is specifically designed for employees of non-profit organizations.

In a 403(b) plan, employees can contribute a portion of their income on a pre-tax basis, meaning they don't have to pay taxes on that money until they withdraw it from the plan in retirement. Employers can also make contributions to the plan on behalf of their employees.

403(b) plans typically offer a range of investment options, such as mutual funds, annuities, and life insurance policies. The plan's goal is to provide employees with a way to save for retirement and to allow them to benefit from the tax advantages of saving in a qualified retirement plan.

Who is eligible for a 403(b)?

Employees of certain non-profit organizations, as well as employees of public schools, colleges, and universities, are typically eligible to participate in a 403(b) plan. Eligibility requirements may vary depending on the specific plan, but generally, if you work for a qualifying organization, you may be eligible to participate in a 403(b) plan.

You cannot have a 403(b) if you exceed contribution limits or already participating in another retirement plan, such as a 401(k) or IRA. Speak to an accountant who can help you navigate should you have various retirement plans.

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What are contibution limits?

The contribution limits for a 403(b) plan are set by the IRS and may change from year to year. For 2023, the contribution limits for a 403(b) plan are:

The annual elective deferral limit is $19,500. You can contribute this maximum amount to the plan on a pre-tax basis through payroll deductions.
If you are 50 or older, you may be eligible to make catch-up contributions of up to $6,500 in 2023. This means you can contribute an additional $6,500 on top of the annual elective deferral limit.
The annual limit on employer contributions is $61,000 or 100% of your compensation, whichever is less. This includes any matching or non-elective contributions made by your employer.

It's important to note that the total of all contributions made to your 403(b) plan, including elective deferrals, employer contributions, and any catch-up contributions, cannot exceed the annual limit set by the IRS. For 2023, this limit is $64,500, or $70,000 if you are age 50 or older and eligible to make catch-up contributions.

Why you may need a 403(b)

Here are a few reasons why a 403(b) plan may be a good option for you:

Tax benefits

Contributions to a 403(b) plan are tax-deductible, meaning you can reduce your taxable income by contributing to the plan. Additionally, your contributions grow tax-deferred, meaning you won't have to pay taxes on the money until you withdraw it in retirement.

Employer contributions

Many employers offer matching contributions to 403(b) plans, which can help boost your retirement savings. Some employers also offer non-matching contributions or other incentives to encourage employees to participate in the plan.

Investment options

403(b) plans typically offer a range of investment options, such as mutual funds, annuities, and life insurance policies. This can allow you to diversify your investments and potentially earn a higher return.

Retirement income

By contributing to a 403(b) plan, you are building a source of retirement income that can help you maintain your standard of living in retirement. With a 403(b) plan, you can control your retirement savings and choose how to invest your contributions to best meet your long-term financial goals.

Pros and cons

Pros

Tax benefits. Contributions to a 403(b) plan are tax-deductible, and the money grows tax-deferred until you withdraw it in retirement. This can help lower your current tax bill and potentially increase your retirement savings.
Employer contributions. Many employers offer matching contributions or other incentives to encourage employees to participate in a 403(b) plan. This can help boost your retirement savings.
Investment options. 403(b) plans typically offer a range of investment options, such as mutual funds, annuities, and life insurance policies. This can allow you to diversify your investments and potentially earn a higher return.
Retirement income. By contributing to a 403(b) plan, you are building a source of retirement income that can help you maintain your standard of living in retirement. With a 403(b) plan, you can control your retirement savings and choose how to invest your contributions to best meet your long-term financial goals.

Cons

Limited eligibility. 403(b) plans are typically only available to employees of non-profit organizations and public schools, colleges, and universities. If you work for a for-profit company, you may not be eligible to participate in a 403(b) plan.
Contribution limits. There are limits on how much you can contribute to a 403(b) plan each year. If you want to save more for retirement than the annual contribution limits allow, you may need to explore other retirement savings options.
Limited investment options. While 403(b) plans typically offer a range of investment options, the plan may limit the specific options available. This can make finding the right investment mix for your goals and risk tolerance more difficult.
Withdrawal restrictions. Withdrawals from a 403(b) plan are generally subject to a 10% penalty if you are under 59 1/2. This can make accessing your savings before retirement difficult, especially if you need the money for unexpected expenses.

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The bottom line

A 403(b) plan can be a powerful tool for saving for retirement and building long-term financial security. If you work for a non-profit organization or a public school, college, or university, a 403(b) plan may be a good option to consider as part of your overall retirement planning strategy. With tax benefits, employer contributions, a range of investment options, and the potential for retirement income, a 403(b) plan can help you achieve your long-term financial goals and maintain your standard of living in retirement.

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