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What Is a 403 B Plan?
For some employees of public schools and tax-exempt organizations, a 403 B plan is a retirement account.
Teachers, school administrators, professors, government employees, nurses, doctors, and librarians are the members of this 403 B plan.
The 403 B plan belongs to the family of 401(k) plan.
Both the plans offer employees a tax-advantaged way of saving for retirement, but 401(k)s serve private-sector employees and there are very few investment choices in a 403b.
Understanding a 403(b) Plan
Both the features and advantages of a 403 (b) plan and the 401(k) plan are quite similar.
The basic contribution limit is the same for both, which is $19,500 in 2020 and 2021.
In 2021 the combination of employee and employer contributions are restricted to the lesser of $58,000, that was $57,000 in 2020, or the full amount of the employee’s most recent annual income.
Roth option is also offered by both where the participant is required to reach the age of 59½ to withdraw funds without suffering an early withdrawal penalty.
For those aged 50 and above in 2020 and 2021, the 403(b) plan offers $6,500 catch-up contributions just like the 401(k).
It also offers a special plan for those with 15 or more years of service with the same employer, which is not the benefit of 401(k).
Though not always but sometimes you could end up getting access to both a 401(k) and a 403(b) plan with your job situation.
Benefits of a 403 B Plan
- Until you withdraw the earnings and returns on amounts in a regular 403(b) plan are tax-deferred. And if the withdrawals are qualified distributions, then the earnings and returns on amounts in a Roth 403(b) are tax-deferred.
- Employees with a 403(b) may also be eligible for equal contributions, depending on the employer the amount defers. If it doesn’t match then it deprives the employees of the essentially free money it could have provided, but the bright side being it may lead to lower administrative costs.
- The administrative fees are lower for 403(b) plans that is not having the onerous oversight rules of the Employee Retirement Income Security Act (ERISA) when compared to 401(k)s or other retirement plans subject to greater oversight. They cannot have employer contributions is one of the rules for non-ERISA 403(b) plans.
- Compared to 401(k)s many 403(b) plans place funds over a shorter period, and some even allow immediate vesting of funds, that is a rare case with the 401(k)s. Employees can make additional catch-up contributions to a 403(b) plan if they have 15 or more years of service with certain nonprofits or government agencies, which can’t be made by those who have a 401(k) plan.
- Under this provision, an annual contribution of an additional $3,000 can be made up to a lifetime limit of $15,000. And you don’t have to be 50 or older to take advantage of this which is the case with many usual retirement plan catch-up provisions. The condition being you have to have worked for the same eligible employer for the whole 15 years.
The Downside of a 403 B Plan
- Like a 401(k), if you withdraw funds from a 403(b) plan before age 59½ then you are liable for a 10% tax penalty, under certain situations, you may avoid the penalty completely like when you are separating from an employer at age 55 or older, in need to pay a qualified medical expense, or have become disabled.
- Compared to the other types of retirement plans a 403(b) may offer fewer choices of investments. Because the 401(k)s tend to be operated by mutual fund companies, that can offer a variety of these diverse and versatile investment options.
- Now even mutual fund choices are offered by most 403(b) plans, even if in many cases it is inside a variable annuity contract. the only types of investments permitted inside these plans are fixed and variable contracts and mutual funds, other securities, like the stocks and real estate investment trusts (REITs), are banned.
- The 403(b)s favor for the presence of an investment option is a mixed blessing. In 1958 when the 403(b) was designed, it was known as a tax-sheltered annuity. With changing times, and now 403(b) plans can offer mutual funds, yet many still emphasize annuities.
- These investments have some benefits but often for a variety of reasons, the financial advisors suggest against investing in annuities in a 403(b) and other tax-deferred investment plans.
- The 403(b)s not having ERISA protection, accounts do not the same level of protection from creditors as the plans that require ERISA compliance, including 401(k)s. If the creditors are pursuing you, then speak to a local attorney who understands the subtlety of the laws of your state.
- Another bane with a non-ERISA 403(b) is their exemption from nondiscrimination testing. This testing is done annually and is drafted to stop management-level or highly compensated employees from receiving a disproportionate amount of benefits from a given plan.
Conclusion
Both 403(b) and 401(k) are similar, but a 403 B plan serves employees of public schools and tax-exempt organizations instead of private-sector workers.
The plus point of a 403(b) in comparison to a 401(k) is, it can include faster vesting of your funds and it enables making additional catch-up contributions.
A 403(b) has limited investment choices, and some accounts offer more risk from creditors compared to 401.
