What Is a 403(b) Retirement Account?

Posted By Ziga Breznik, Last updated: March 2, 2020

 

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A 403(b) account is a kind of retirement account intended for specific employees. This tax sheltered annuity account is designed to give specific people certain tax benefits compared to regular savings accounts and non-regulated savings. You can read more about the tax-benefit precious metals IRA rollover here. Although it’s similar to a 401(k), this plan is designed specifically to be offered to non-profit organizations, public schools, churches, and other tax-exempt groups.

In the past, 403(b) plans provided fewer investment options for contributing organizations. However, the solutions available from these strategies have become a lot more robust over the years.

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Exploring the basics of the 403(b) plan

The advantages and features of a 403(b) plan are generally quite similar to what you’d get from a 401k.
 
For instance, you get:
 
  • The same contribution limits ($19,500 in 2020)
  • The same combined employee/employer contribution limits
  • ROTH options
  • A required age of 59 and a half before users can withdraw funds without a penalty
  • $6,500 in allowance for catch-up contributions for those over the age of 50.
  • Special plans for those with 15 years of service or more with the same employer.

Although it’s not common there are instance when you could be able to access both a 401(k) and a 403(b) account. When this happens, you can contribute to both accounts, but you’ll still not be able to contribute more than $19,500 overall. 

403(b)plans allow employers to not include elective contributions in your plan if your grows income is under the amount required for the elective deferrals rule.

Facts to Know About the 403(b) vs the 401(k)

Coming to terms with plans can be very complicated at first. If you’re familiar with the 401(k) plans that are available on the market today, then you probably consider 403(b) options to be very similar. However, there are some differences to be aware of.

For instance, you can’t get a 403(b) account unless you’re working with a non-profit organization.

Other facts to know

  • Early withdrawals are easier: A big difference with 403(b) plans is that if you retire at the age of 55 or older, you can begin taking distributions from your 403(b) plan without a penalty. You don’t have to wait until you’re 59 and a half. 
  • Administrative costs: The expenses associated with 403(b) accounts can vary according to the administrator that your employer picks. However, these accounts often have lower costs. This means additional money from employers into employee accounts in most cases. 
  • Maintenance/investment costs: Though the administrative costs to employers can be lower, costs to employees for making investments can be higher for 403(b) accounts. Once again, the exact prices will depend on the administrator chosen by your employer. Make sure you know the details of the fees before you invest. 
  • Limited investments: Although the number of options you have for investing in 403(b) plans has increased over the years, it doesn’t compare with the freedom that you can get with a 401(k).

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The Pros and Cons of a 403(b) Plan

Like any retirement account, 403(b) options have their pros and cons to consider. For instance, the earnings and returns on a regular 403(b) account are tax-deferred until you withdraw them, which is excellent for saving you money.

However, you can’t always access the same number of investment opportunities with a 403(b) plan as you would with a traditional 401(k).

PROS

  • Employees can be eligible for matching contributions provided by their employer. 
  • Withdrawing money from your account can sometimes be easier – particularly if you retire over the age of 55. 
  • 403(b) plans require a shorter vest funding period than 401(k) plans. Some options even allow for the instant fund vesting – which is not an option for most 401(k)s
  • If you have more than 15 years of service with a particular non-profit or government agency, then you may be permitted to make additional contributions to your account that you couldn’t access with a 401(k). Sometimes, you will be allowed to contribute up to an additional $3,000 a year. 
  • Unlike traditional retirement plan catch-up provisions, if you have 15 years of service with a particular government group or non-profit, you don’t have to be older than 50 to take advantage of catch-up payments.

CONS

A 403(b) plan comes with various pros and cons to consider. For instance, you will need to be 59 and a half or older to withdraw funds from your account unless you retire at the age of 55 or above, or you have certain medical expenses to consider.

Additionally, 403(b) plans usually come with a narrower selection of investment options to choose from than other forms of retirement plan. That’s because 401(k)s are usually administered by mutual fund companies. This allows for a more diverse selection of investments. Although most 403(b) plans do offer mutual funds too now, there are less options available. It’s more common to get fixed and variable contracts. 

The Mixed Blessing of the 403b Account

When the 403(b) was originally invented in the year of 1958, it was a tax-sheltered annuity. In today’s world, times have changed and many of these plans come with mutual funds – many still focus heavily on annuities. Although these investment options do have their benefits, many financial advisors recommend against investing in annuities in 403(b) plans. 

Additionally 403(b) plans that don’t have ERISA protection – such as those without employer matches, might not have the same kind of protection usually offered from creditors as you would get from ERISA compliant options. This means that you may need to speak to an attorney for additional help. 

Non ERISA 403(b) plans are also problematic because of the fact that they are exempt from non-discrimination testing. This testing is intended to ensure that no management-level or highly compensated employees are receiving an unfair amount of benefits from a plan.

What Happens To Your 403b Account When You Switch Your Employer?

We know that you can benefit from a range of advantages if you choose to stick with the same employer for an extended period of time with your 403(b) account. However, most people don’t understand what happens when they switch employers. 

Changing jobs is a common fact of life with our modern economy. However, with most retirement plans, you wouldn’t lose your retirement funds just because you change to a new job. In the same way, you wouldn’t lose your retirement with a 403(b) account if you changed to a new employer.

Exactly what you can do with your 403(b) account will depend on a number of things, including your new and old employer. You might:

  • Roll your plan over: 403(b) plans can only be rolled over in certain circumstances. However, changing your job just happens to be one of those circumstances. As long as you don’t lose any money, and your employer plans allow for a transfer, this is an easy option.
  • Cash it out: Although it’s not recommended to choose this option, due to serious tax problems, some people choose to cash out their 403(b) accounts with their current provider. This allows them to take the money immediately and start building a new account with their new employer. You will pay taxes on this option.
  • Let it ride: Some employers will allow former employers to leave their 403(b) sitting with the current administrator for as long as they choose. 
  • Rollover to new plan types: If your employer won’t allow you to access a plan that you can roll your 403(b) into, then you could consider rolling your 403(b) plan into a traditional or Roth IRA instead. There are some rollovers that will not allow all contributions to transfer from one to the other. It’s best to learn as much as you can about your options before you begin.

When Can You Withdraw From Your 403(b) Account and The Rules

As mentioned above, distributions taken from a 403(b) account usually become possible at the age of 59 and a half. However, there are some confusing aspects to having a 403(b).

There’s a special rule built into this kind of plan for people who retire at the age of 55 or over and want to begin taking their contributions early. There are also other situations where you may be able to take contributions from your account without facing penalties. 

Notably, most requests for early distributions will follow the same rules as the 401(k) plan and other accounts for retirement. However, you could potentially take this money out early in certain cases – such as if you need to pay for insurance costs for accident, health or plans for long-term care. There’s also an option that you can sometimes take this money if you are called to duty. 

Again, to make sure that you’re not going to encounter any tax issues, you’ll need to make sure that you speak to a professional about your options.

Summary

Ultimately, there are always going to be upsides and downsides to any kind of retirement account. This solution is very similar to the standard 401(k), but it has some important differences to consider too. The good news is that the downsides of a 403(b) are rarely enough to stop someone from using the 403(b) as a powerful vehicle for investment. 

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