WHAT
IS A 403(b) PLAN?
We
like to call the 403(b) plan the "cousin"
to the 401(k) plan. It functions nearly exactly like
the 401(k). The only real difference is the 403(b) plan
is offered to employees of 501(c)(3) non-profit agencies,
school districts, religious organizations, not-for-profit
hospitals, state & local government agencies, and
many forms of not-for-profit corporations.
The
403(b) plan is an employer-sponsored retirement plan
defined under section 403(b) of the Internal Revenue
Code (26 U.S.C. § 403(b)). The 403(b) plan does
offer some unique flexibility in the types of funds
and bonds that may be held in these accounts by the
employee and the 403(b) also offers some unique tax-benefits
not offered by the 401(k), but these benefits are (for
the most part) incredibly complex thus making them hard
to explain. For exact details please refer to your accountant
or financial advisor.
So...
what exactly is the 403(b)?
A 403(b) plan allows a worker to save for retirement
while deferring income taxes on the saved money and
earnings until they are withdrawn. The employee elects
to have a portion of his or her wage paid directly,
or "deferred," into his or her 403(b) account
(taken right out of his paycheck). In participant-directed
plans (the most common option), the employee can select
from a number of investment options, usually an assortment
of index funds or mutual funds that emphasize stocks,
bonds, money market investments, or some mix of the
above. One other significant difference between the
401(k) and the 403(b) is "company stock options."
Obviously, a not-for-profit entity would not have shares
that can be privately held therefore could not offer
stock options through its company retirement plan.
For
many, a properly used individual retirement plan, such
as the 403(b) plan, is an integral part of retirement.
But just because your employer offers a plan like this
doesn't mean there's anybody in your office that will
tell you what to do with it. This is where a competent
financial advisor might be useful... or you could call
us now and we would be glad to help you understand it
a bit more.
What
are the benefits of a deferred retirement plan?
If your employer matches your contributions to your
403(b) this really should be the first place to devote
every dollar that you can afford to lock away for the
long term. Why? Well, you're staring at free money,
and you shouldn't just stare at free money -- you should
take it. Other advantages of an employer-sponsored plan
include:
Tax
deduction: the money you contribute to the
employer plan is not included in your income for tax
purposes.
Tax-deferral: you don't pay taxes
until you retire; that leaves more of your money to
grow through the years
Automatic investment: the money
is transferred directly from your paycheck to your
account; no checks to write, no monthly reminders,
no paper cuts to the tongue while sealing the envelope.
Making
your employer's plan the first stop applies only to
those dollars you defer that are joined by matching
dollars in your account. Check your plan. For instance,
if the employer offers a match only up to the first
$3,000 that you contribute annually, but you're contributing
$5,000, those $2,000 unmatched dollars might very well
be put to even better use elsewhere.
So
this begs the question... where else might I put my
money?
Well, for starters you will want to understand
that monies in your 403(b) plan can be rolled over into
a self-directed
401(k)-plan (traditional or Roth) if allowed by
your employer's custodian. Or you may rollover the funds
at any time, without any restrictions from your employer's
custodian, into the type of account we most often recommend
to our the clients: a self-directed
IRA (traditional or Roth). Furthermore, there is
no rule against having multiple retirement accounts.
If you have a 403(b) and you are contributing the maximum
that is matched by your employer, then you can contribute
more monies to a separate retirement account -- namely,
a self-directed
Roth IRA!
DISCLAIMER:
WN Funding or its affiliates hold
no licenses for financial planning and WN Funding is
not a registered security with the Securities &
Exchange Commission.
None of the information on this website should be
viewed as tax or legal advice. Please be sure to consult
your attorney, accountant, and/or other licensed professional
needed before considering any investment or conversion.
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