There are numerous types of retirement plans out there. Depending on your career, your retirement plan options may vary. While a 403(b) retirement plan, also called Tax Sheltered Annuity (TSA) Plan, is not as common as a 401(k) retirement plan, it is still a valuable option for investing in retirement.
This type of retirement savings account is offered to those whose career lies within an organization (i.e. nonprofit, hospitals, public education). This type of retirement plan is not one of the most common plans, however, that does not mean it is not a good opportunity for investment in retirement if you are an employee of a tax-exempt organization. The most common career path that will likely offer a 403(b) retirement plan is public education. Teachers and other educators all over the nation are very likely to have this type of retirement plan. Here are some of the basic details.
Money typically goes into this retirement account tax-free. When it is taken out in retirement, it is then taxed. For those that assume they will be in a much higher tax bracket once they reach retirement, this might not be the best option. For those who assume that there won’t be many changes between now and then, this could be a great option for you if your employer offers this type of plan.
The benefits of this type of retirement plan may include matching employee contributions and tax write-offs. Moreover, the money in your 403(b) can grow year after year with taxes deferred. The disadvantages of this type of retirement plan include: withdrawals being restricted until you are 59 ½, unless specific situations arise. Another disadvantage is that if you withdraw early, that withdrawal is taxed 10%. As a result of these withdrawals being taxed as income and not capital gains, “Contributors get the benefits of tax deferral but forfeit the more advantageous long-term capital gains treatment” (Van Steenwyk, 2020).
The contribution limit for a 403(b) retirement plan in 2020 is $19,500 with an additional $6,500 available for those over 50 (IRS). For more information on the technicalities of this particular retirement plan, you can visit here.
A Roth 403(b) option could also be offered. This means that the retirement plan is funded with after-tax contributions, and that the participant will not receive a tax deduction. Withdrawals are not taxable with this option as long as all eligibility requirements are met.
If you are an educator, part of a nonprofit organization, or work for a church, then a 403(b) retirement plan is a great option for you. If you would like to learn more about this particular retirement plan and how it can help you plan out your financial future, give us a call! We would love to host a virtual meeting with you to go over the specifics of this plan and any questions you may have.
Van Steenwyk, Jason. “Advantages and Disadvantages of a 403(b).” Sapling.com, 2020, www.sapling.com/7430092/advantages-disadvantages-403b.