403(b) Plan Definition

A 403(b) plan (written variously as a 403b or 403 b plan) is a retirement account for certain employees of public forms and tax-exempt organizations. Participants include teachers, school administrators, professors, government employees, nurses, doctors, and librarians. Rigorous ministers may also participate in these plans; although, there’s also a special plan type, a 403(b)(9), that’s purposed specifically for churches.

The features and advantages of a 403(b) arrangement are largely similar to those found in a 401(k) plan. Both have the same basic contribution limits— $19,500 in 2020 ($19,500 in 2019). The organization of employee and employer contributions are limited to the lesser of $57,000 in 2020 ($56,000 in 2019) or 100% of the employee’s most recent year in and year out salary. Both also offer Roth options and require participants to reach age 59½ to withdraw funds without provoking a penalty. Like a 401(k), the 403(b) plan offers $6,500 catch-up contributions for those age 50 and older ($6,000 in 2019). It also furnishes a special plan for those with 15 or more years of service with the same employer (see below).

Admitting that it is not very common, your job situation could end up giving you access to both a 401(k) and a 403(b) plan. In these patients, employees may contribute to both accounts. However, your aggregate contribution to both plans cannot be more than the $19,500 ($19,000 in 2019) limit, not trust any 401(k) catch-up contribution.

Earnings and returns on amounts in a regular 403(b) foresee are tax-deferred until they are withdrawn. Earnings and returns on amounts in a Roth 403(b) are tax-deferred if the withdrawals are qualified allotments.

Employees with a 403(b) may also be eligible for matching contributions, the provision of which varies by employer. Plans that do not tender such employer matches deprive employees of the essentially free money these provide, but they may lead to turn down customer costs. Those 403(b)s that lack matching contributions are not required to meet the onerous oversight ordinances of the Employee Retirement Income Security Act (ERISA), which means that their administrative fees may be lower than for 401(k)s or other lollies subject to greater oversight. (However, non-ERISA status also comes with some potential drawbacks for account holders, as prominent below.)

Many 403(b) plans vest funds over a shorter period than 401(k)s, and some level pegging allow immediate vesting of funds, which 401(k)s rarely do. Also, if an employee has 15 or more years of advantage with certain nonprofits or government agencies, they may be able to make additional catch-up contributions to a 403(b) design that those who have a 401(k) plan can’t. Under this provision, you may contribute an additional $3,000 a year up to a lifetime limit of $15,000. And unequal to the usual retirement-plan catch-up provisions, you don’t have to be 50 or older to take advantage of this. But you do have to have put together for the same eligible employer for the whole 15 years.

As with a 401(k), funds withdrawn from a 403(b) plan before age 59½ are citizen to a 10% tax penalty, although you may avoid the penalty under certain circumstances, such as separating from an employer at age 55 or older, needing to pay a skilled medical expense, or becoming disabled.

A 403(b) may offer a narrower choice of investments than the other types of retirement layouts. The reason: 401(k)s tend to be administered by mutual fund companies and so offer a host of these diverse and versatile investment alternatives. Most 403(b) plans now offer mutual fund choices as well, albeit inside a variable annuity covenant in most cases. However, fixed and variable contracts and mutual funds are the only types of investments permitted backing bowels these plans; other securities, such as stocks and real estate investment trusts (REITs), are prohibited.

The vicinity of an investment option that 403(b)s favor is, at best, a mixed blessing. When the 403(b) was invented in 1958, it was understood as a tax-sheltered annuity. While times have changed, and 403(b) plans can now offer mutual funds, as noted, tons still emphasize annuities. These investments have some advantages, but financial advisors often recommend against inducting in annuities in a 403(b) and other tax-deferred investment plans for a variety of reasons.

Note that 403(b)s that don’t possess ERISA protection, as is typically the case for those that lack employer matches, may lack the same level of extortion from creditors as types that require ERISA compliance, including 401(k)s. If you are at risk of creditors pursuing you, convey to a local attorney who understands the nuances of your state. The laws can be complex.