What are 403(b)s?
Discover the retirement savings vehicle designed for educators and non-profit employees.
Terri Fassi, CPA, MBA, CDFA
Virtually every working adult knows what a 401(k) plan is, but the 403(b) plan is comparatively unheralded. If you’re an educator, educational administrator, or non-profit employee, this is your version of the 401(k).
You can choose how the money in your 403(b) plan is invested, and you can make steady contributions to it. Over time, a 403(b) may prove to be your most vital retirement savings vehicle.
403(b) basics. There are three compelling reasons to participate in a 403(b) plan.
One, it’s way to invest in order to amass retirement savings. Teachers and other non-profit employees are often lined up to receive a pension when they retire, but few pensions provide the equivalent of an end salary. The assets invested in a 403(b) plan can potentially grow into additional retirement savings, which can supplement the pension.
Two, the contributions you make to a traditional 403(b) plan are made on a pre-tax basis. The more you contribute to your plan, the greater your potential tax savings as a result of your investment.
Three, you get tax-deferred growth. The earnings in your 403(b) grow tax-free until you withdraw them at retirement.
So, this is why teachers and non-profit employees regularly defer small percentages of their salaries into 403(b) plans. In combination, long-term contribution, long-term investment and compounding may leave them with sizable retirement savings.
Roth 403(b)s. In 2006, a new 403(b) option emerged. Some 403(b) plans now permit participants to designate some or all of their elective contributions as Roth contributions, rather than the usual traditional, pre-tax elective contributions. In other words, you pay taxes now on the money you set aside in the 403(b), instead of paying taxes at the time of withdrawal. Employers can even make matching contributions on these designated Roth contributions.
This Roth option may be particularly useful for younger teachers, administrators and non-profit employees with a longer retirement horizon and more time to amass tax-free earnings under the Roth feature. It also appeals to people who think they will be in a higher tax bracket when they retire.
Are you in a 403(b)? If you’re an educator or non-profit employee, your campus or non-profit probably offers a 403(b) plan and maintains contact with a financial advisor who helps employees enroll in the plan. In fact, you may already be in a 403(b) – Congress permitted automatic enrollment in these plans in 2000. Whether you participate or have yet to participate, a chat with a financial advisor about your 403(b) plan is very wise and can be very illuminating. It doesn’t take long at all – years from now, you may look back on the hour or half-hour you spent as time VERY well spent.
If you would like to know more about 403(b)s, your own retirement savings potential, and the types of investment choices you may have, then be sure to talk with a qualified financial advisor today.
Terri Fassi may be reached at 970-416-0088 or firstname.lastname@example.org
These are the views of Peter Montoya, Inc., not the named Representative nor Broker/Dealer, and should not be construed as investment advice. Neither the named Representative nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.