A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees’ accounts.
Employees of companies in the private sector have 401(k) plans to help build their retirement savings. But what exactly is a 403(b) plan? If you’re a school teacher or work for a tax-exempt organization, a 403(b) plan is a tool that may help you reach your retirement goals. 403(b) retirement plans are also known as tax-sheltered (or tax-deferred) annuities.
Here are a few things to consider about the 403(b) option:
Tax-deferred 403(b) plans are designed for employees of public schools, colleges and universities, churches and other religious organizations. Employees of certain other tax-exempt, non-profit organizations such as charities or certain hospitals can also participate in a 403(b) retirement plan.
A 403(b) plan lets you set aside a portion of your salary in an employer-sponsored account to save for retirement. Some employers may also match your contribution. That’s like getting free money for participating in your retirement plan.
You don’t pay taxes on your contributions to the plan, or on any earnings the account accumulates until you withdraw the money – which ideally happens when you’re retired. And by then you may be in a lower tax bracket – so there are potential savings every step of the way.
With a 403(b) retirement plan, you can typically invest in fixed annuities, variable annuities or mutual funds. Ask your advisor to help you choose investments that best meet your retirement objectives. Also remember that investing involves market risk, including possible loss of principal, and there’s no guarantee that your investment objectives will be met.
Enrolling in your employer’s 403(b) retirement plan is a big step in preparing for your future. You can start small − the important thing is that you start investing now so your money has time to potentially grow.
If your employer doesn’t offer a 403(b) plan, find out if they have another kind of retirement plan. Or ask your investment professional about other ways to start investing for retirement.
Because 403(b) plans were created to help you save for retirement, there may be harsh penalties for withdrawing money early, including:
- Income taxes on the total withdrawal
- A 10% penalty if you’re younger than 59½
- 20% federal income tax withholding – unless the entire amount is rolled over to another qualified retirement plan or IRA
Investment advisory services offered through Allmerits Asset Management, LLC, a Registered Investment Adviser firm. Allmerits Asset Management does not provide legal or tax advice. Investment Adviser Representatives of Allmerits Asset Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and Annuity products are sold separately through Allmerits Financial and Insurance Service. Securities transactions for Allmerits Asset Management clients are through Trust Company of America, TD Ameritrade, Nationwide, John Hancock and American Funds.