The 403(b) plan is designed for employees of tax-exempt organizations such as healthcare providers, educational institutions, public schools, and churches. Similar to a 401(k), these plans allow employees to save for retirement while potentially enjoying various tax advantages.
A 403(b) plan is a retirement savings account that allows employees of tax-exempt organizations to contribute pre-tax dollars directly from their paycheck. These contributions are then invested in mutual funds and annuities, growing tax-deferred until withdrawn during retirement. Alternatively, some employers may offer Roth contributions, which are made with after-tax dollars, allowing withdrawals, including investment earnings, to be tax-free at the federal level.
As of 2022, most individuals can contribute up to $20,500 annually to their 403(b) accounts. Additionally, employees who are 50 or older or have a long tenure may be eligible for extra catch-up contributions. Employers can also provide matching contributions to encourage participation in the plan.
There are two main types of 403(b) plans:
Traditional 403(b) plan – Contributions are made with pre-tax dollars, reducing current taxable income. Withdrawals are taxed at the investor's ordinary income tax rate.
Roth 403(b) plan – Contributions are made with after-tax dollars, meaning there are no upfront tax benefits. However, if the investor meets specific criteria, such as being at least 59½ years old, disabled, or deceased, withdrawals, including investment earnings, are tax-free.
Individuals should carefully consider which type of 403(b) plan best suits their needs based on their current financial situation and future goals. Employers, plan providers, and financial advisors can offer guidance and resources to help individuals make informed decisions about their retirement savings.