Is a 403b Better Than a 401K?
Many employees of public schools and certain 501(c)(3) tax-exempt organizations save for retirement using 403(b) plans, similar to 401(k) accounts but with benefits like automatic savings and investment options.
Employers typically offer matching contributions, giving you additional money to invest. Learn about how a 403(b) plan operates and what you should expect if you participate.
Tax-Advantaged Savings
403(b) accounts provide an efficient means to save for retirement, offering tax advantages, higher contribution limits and employer match if your employer offers it. Furthermore, earnings accumulate tax-deferred and won’t be subject to income taxes until your account withdrawal.
Many public schools, universities and nonprofit organizations provide 403(b) plans for their employees. These accounts enable you to contribute pretax dollars with which you reduce taxable income while potentially reducing taxes due in the year of deposit.
403(b) plans allow individuals to invest their savings through mutual funds managed by reliable investment firms, maximizing compounding returns over years and decades – which is especially helpful if saving for retirement on top of working income. You may even choose systematic withdrawals as part of their retirement income stream.
Employer Match
Similar to 401(k) plans, 403bs provide employees of public schools and tax-exempt organizations the chance to save for retirement through pretax savings plans. Employees may invest in mutual funds, annuities and stocks while some employers provide matching contributions as an incentive for employees to save more. Those working at eligible employers for 15 or more years can make catch-up contributions of up to $3,000 annually – potentially increasing savings dramatically!
Employees should invest their annual payroll deductions as early as possible so they can benefit from compound interest and work with a financial advisor to diversify their portfolio.
Fidelity recommends saving 15% of your annual income for retirement, which includes employer-matched contributions. While this amount may seem intimidating now, most will likely be in lower tax brackets during retirement and it should therefore be easier to save this much money.
Tax-Free Withdrawals
Rules and features of 403b plans can differ between employers, so it is wise to inquire with them as to what options may be available in their plan. Some plans allow participants to make catch-up contributions after age 50 while others do not, while some even offer loan options of up to $50,000 or half of their vested account balance.
403b plans also allow penalty-free withdrawals in cases such as financial hardship or disability, as well as distributions after retirement (required minimum distributions or RMDs). Early withdrawals will incur an additional 10% federal tax penalty in addition to income taxes.
As well as these advantages, 403bs can also be less expensive than their 401K counterparts due to fewer reporting and fiduciary requirements under ERISA-governed 401K accounts. Still, fees do vary based on plan size and investment options – it is wise to compare costs.
Investment Options
403(b) plans vary greatly in their investment options depending on their vendor. According to an article in 2016 from The New York Times, some teachers’ 403(b) plans featured poor investment choices and high fees; a good vendor typically offers more robust investments such as mutual funds and annuities.
The 403b makes saving for retirement easy by automatically deducting money from each paycheck into an account each pay cycle and permitting participants to save extra funds with its catch-up provision.
Most 403(b) plans allow only annuities and mutual funds for investment purposes. To get the most from your 403(b), aim for low-cost stock and bond mutual funds recommended by experts; remembering to select a ratio that satisfies both your time horizon and risk tolerance; target date funds may also help automatically adjust as you approach retirement; additionally, keep in mind the annual expense ratio which comes directly out of investment returns each year.
Categorised in: Blog