Similar to its 401(k) cousin, this plan has some real pluses
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Top 9 Benefits Of A 403(b) Plan
A 403(b) plan is a tax-sheltered retirement plan for employees of many non-profit entities, including public safety and educational organizations. They’re similar to 401(k) plans in several ways. Here are their top nine benefits.1, contributions to 403(b) plans are tax deductible, meaning the money that goes into the plan is money that is not taxed.2, taxes are not paid on the money in the 403(b) until distributions are made in retirement. During retirement, most people find themselves in a lower tax bracket.3, some 403(b) plans have a Roth option. Those contributions are not tax deductible, but withdrawals from a Roth account will not be taxed.4, savings grow tax-free in a 403(b), eliminating the drag that taxes can impose.5, loans can be taken against most 403(b) plans, which can be helpful in certain situations, such as buying a home.6, employers can make matching contributions on a 403(b) plan, providing their employees with free money.7, some 403(b) plans offer exposure to low-cost institutional funds that would otherwise require high investment minimums.8, 403(b) plans have higher contribution limits than IRAs. The more money that can be saved in tax-sheltered accounts, the better.And 9, some 403(b) plans allow for additional contributions for employees who have 15 years of service, and have not made excess contributions.
Reviewed by Anthony BattleFact checked by David RubinReviewed by Anthony BattleFact checked by David Rubin
A 403(b) plan is a tax-sheltered retirement plan for people who work for nonprofits, including charities, schools, and qualified religious organizations. The 403(b) plan is comparable to its private-sector counterpart, the 401(k) plan, with important differences.
If you’re considering enrolling in a 403(b) plan, check out the benefits below.
Key Takeaways
- The 403(b) plan is similar to the 401(k) plan, which is available for private-sector employees.
- If your employer offers it as an option, you may have a choice of traditional or Roth.
- A feature unique to 403(b) plans allows some employees with 15 years of service at the same employer to make extra contributions.
Tax-Deductible and Tax-Free
Contributions to a traditional 403(b) plan are deductible on your federal income taxes. The money comes out of your gross salary and goes directly into the 403(b) plan, untaxed.
This cuts down on the income tax you owe for that year based on your top marginal tax rate. For example, if the last $10,000 of your adjusted gross income is taxed in the 22% tax bracket, placing $10,000 into a 403(b) would save you $2,200 in taxes.
If you opt for a traditional 403(b) plan, you don’t pay taxes on the money you pay until you begin making withdrawals after you retire.
It’s important to note that you won’t owe taxes on the investment growth in your account until after you retire. The money will grow tax-free until you begin making withdrawals.
You will be able to change your investment choices without losing much, except for some trading fees. And because the tax efficiency of your mutual funds isn’t a concern, you can concentrate your portfolio on investments that offer high returns and low expenses.
The Roth Alternative
Since 2006, participants have also had the ability to choose a Roth rather than a traditional 403(b) plan. If you opt for a Roth, you’ll pay the income taxes upfront in the year in which you contribute the money. But you’ll owe no taxes on your contribution or the profits it earns when you take the money out after retiring.
A Potential Employer Match
Your employer might make matching contributions to your 403(b). Some employers kick in as much as 50 cents to $1 for every dollar you contribute. Others contribute nothing.
Important
Many financial advisors caution against borrowing from your 403(b) account because it leaves less money invested for your retirement. Even though you repay it, you’ve lost time in which your money could have been compounding.
High Contribution and Income Limits
You can set aside up to $23,000 in a 403(b) in 2024 ($22,500 in 2023). Those 50 or older can make an additional catch-up contribution of up to $7,500 in 2023 and 2024.
Notably, some 403(b) plans allow certain individuals with 15 or more years working at the same company to make additional contributions—up to $3,000, depending on the particular plan. Check with IRS Publication 571 for a closer look at the 15-year rule and how to calculate allowable contributions.
The total combined contribution limit for 403(b) plans for both the employee and employer in 2024 is $69,000, or $76,500 with the catch-up contribution. It was $66,000 or $73,500 including catch-up contributions in 2023.
For those who want to participate in a 403(b), your income cannot be more than the annual limit set by the IRS. The annual income limit in 2024 is $345,000 (it was $330,000 in 2023).
An Option for a Loan
Sometimes it’s even possible to take out a loan from your account, depending on the rules of your particular 403(b) plan. However, keep in mind that you can trigger heavy IRS penalties for early withdrawal and for missing loan payments.
How Much Can I Contribute to My 403(b) Plan in 2024?
The contribution limit for a 403(b) plan in 2024 is $23,000. For 2023, it was $22,500. Individuals who are age 50 or older have the ability to contribute an additional $7,500 in 2023 and $7,500 in 2024.
What Is the Difference Between a 401(k) Plan and a 403(b) Plan?
401(k) and 403(b) plans are similar in that they are both retirement plans. They also have the same annual contribution limits. The primary difference between the two is that 401(k) plans are for for-profit companies whereas 403(b) plans are for nonprofit organizations.
Can You Lose Your Money in Your 403(b) Plan?
The money that you contribute to your 403(b) plan as well as the matching amounts made by your employer are yours and cannot be withheld from you.
Additionally, the risk of you losing your money due to market movements is low as investments are typically made in safe mutual funds. That being said, your account can witness swings given the market.
The Bottom Line
A 403(b) plan is a great retirement plan for individuals working for nonprofit organizations. It operates similarly to a 401(k) plan and comes with many benefits, such as having a Roth option and a potential employer match, as well as a high contribution limit.
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