We recently covered what a 401(k) is and some of its common aspects. In this article, we'd like to discuss a similar retirement plan used only for a niche population. A 403(b) is a retirement savings plan available to employees of certain non-profit organizations, public schools, and tax-exempt organizations, such as hospitals and religious institutions. It's similar to a 401(k) plan offered by for-profit companies, but 403(b) plans are designed specifically for employees of tax-exempt organizations.
Key Points to Understand a 403b Plan:
Contributions
Employees can contribute a portion of their salary to the 403(b) plan on a pre-tax basis, which means the contributions are deducted from their paycheck before taxes are calculated. This has the advantage of reducing their current taxable income.
Employer Contributions
Some employers offer matching contributions, where they match a certain percentage of the employee's contributions. This is essentially "free money" and can significantly boost retirement savings.
Investment Options
Like a 401(k), a 403(b) offers a variety of investment options, typically including mutual funds, annuities, and sometimes even individual stocks. This allows employees to choose investments that align with their risk tolerance and retirement goals.
Tax-Deferred Growth
The earnings on investments within the 403(b) plan grow tax-deferred, meaning you don't pay taxes on the gains until you withdraw the money in retirement.
Withdrawals
Withdrawals from a 403b plan are generally allowed penalty-free after age 59½. However, if withdrawals are taken before this age, there might be a 10% early withdrawal penalty in addition to income tax.
Roth 403(b)
Some plans also offer a Roth 403(b) option, where employees contribute after-tax dollars. While contributions aren't tax-deductible, qualified withdrawals in retirement, including earnings, are tax-free.
Required Minimum Distributions (RMDs)
Just like with traditional IRAs and 401(k)s, there's a requirement to start taking minimum distributions from a 403(b) plan after reaching age 72 (starting in the year you turn 72), unless you're still actively working for the employer.
Portability
If you change jobs, you can typically roll over your 403(b) funds into another eligible retirement account, such as an IRA or a new employer's retirement plan.
Final Thoughts
It's important to note that the specifics of 403(b) plans can vary between employers, so it's advisable to review your plan's details and consult with a financial advisor to ensure you're making the most of your retirement savings strategy.
*Not financial/legal advice
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