There are so many retirement savings options to choose from. With the 401(k) being most popular, you might not have heard of the 403(b) plan. It’s very similar to the 401(k) but has a few differences. The 403b is a tax-sheltered annuity plan meant for tax-exempt organizations. So, it is typically only offered to establishments such as public schools and religious organizations. Like the 401(k), the employee makes pre-tax contributions meaning you won’t pay taxes immediately. Whether you’re retired with a 403(b), contributing to the plan, or considering retirement plans, understanding the pros and cons of your retirement savings plan is key to getting the most out of it. Making an informed decision is crucial when dealing with your retirement whether you’re experienced or new to the investment game.
One of the most noteworthy advantages of the 403(b) plan is that it is tax-deferred. By putting some of your income aside, you have the potential to substantially reduce your taxable income amount while still working and contributing to your plan, which can save some money in the long run if your tax bracket is lower in retirement. The current contribution limit is $19,000.00 and $25,000.00 for those over 50 years old. This is much higher than the $6,000.00 limit on the IRA. If you contribute the highest amount, you can be saving thousands in income taxes each year.
The growth of 403(b) plans can be massive if timed properly and the market plays along. Either way, you won’t be taxed on the growth while contributing, though you will have to pay taxes upon each withdrawal.
Many 403(b) plans allow you to take a loan without penalty. This can be particularly useful for those wanting to buy a home in the future, have planned big expenses, or any emergencies. Remember, a loan differs from a withdrawal. You will have to pay the loan back within a certain amount of time otherwise it will be considered a withdrawal meaning you’ll be taxed and hit with fees. Make sure to check with your custodian as all plans have different policies and terms.
Like all investments, the 403(b) isn’t perfect. The contributions and growth are tax-free but the withdrawals are not. These are taxed as income instead of capital gains, meaning the rate is potentially higher depending on your tax bracket in retirement.
Like most pre-tax retirement accounts, once you turn 70 and a half you’ll have to take RMDs, which will be taxed. Though, many people are in a lower tax bracket in retirement. Some financial investment companies have strategies that can help you legally stay in a lower bracket and reduce your RMDs. Another downside is that early withdrawals can be hit with a hefty penalty. Some withdrawals can be subjected up to 10% tax on top of your normal income tax percentage.
Whether you’re close to retirement or not, maximizing your 403(b) plan is crucial. Start by asking what indexed funds are available. Typically, your 403(b) uses actively managed funds, which allows a team to pick an investment strategy for you. This can cost up to one percent of your savings. Instead of giving away one percent of your account balance to pay a management team to monitor your account, you can choose indexed funds, which track a specific mark index such as the S&P 500. These typically only take 0.1 percent of your balance and run about the same risk.
Try matching your employer’s contribution percentage. This might seem like a no-brainer, but many people shy away from high percentages because they feel they need the money– even though it is typically only a small amount of your paycheck. Imagine how grateful you’ll be for the big chunk of extra money when you’ll have when retired. If you’re able to, contribute the highest percentage your employer is offering. Take advantage of that free money just for saving!
Understanding your risk tolerance is important when investing. This is your retirement savings, so you don’t want to be too passive or too aggressive depending on your comfort. Your risk profile can determine the best move when investing. Typically, it would be calculated based on age, investment knowledge, and risk comfort.
Finally, just take control! Reach out to your account representative once or twice a year to get their opinion. You’re probably already paying some sort of fee for the representative, so you might as well get your money’s worth. Remember, you can always move your account to another company if you don’t like the representative, treatment, or aspects of it. Don’t be afraid to shop around for other companies with different perks and terms.
Where to Begin
The first step is always the toughest. Try making a to-do list with a timeline and small steps for making the most of your account. There are plenty of ways to maximize your 403(b) plan and it might take some experimenting to find the best strategy for you. Make sure to review the terms of your 403(b) and reach out to your custodian with any and every question you have in order to get the most accurate answer.