A 401k retirement plan has been a standard part of employee benefits packages since the late 1970s. This type of retirement plan involves withholding contributions from each worker’s paycheck and holding those monies tax-deferred in an investment account until that worker retires.
Nonprofit, tax-exempt organizations were not able to offer 401k plans to their workers until 1996. Before that year, the only employer-sponsored option for nonprofits and their employees was known as a 403b plan.
The 403b plan is still an option for nonprofit workers and exists alongside traditional 401k offerings. But what is a 403b, exactly, and is it a good investment? Read on to find out.
What is a 403b?
A 403b is also known as a tax-sheltered annuity (TSA). It works in almost the same way as a 401k.
Employees opt to defer portions of their pay to their account inside the 403b so that these earnings aren’t subject to income tax until they take the money out for retirement purposes. Employers can match employees’ contributions if they choose.
403b plans are usually offered to public and university faculty, church workers, and any 503(c)(3) charitable entity. If you work at a for-profit company, you are not eligible for a 403b.
A 403b is NOT an IRA, in that it is employee-sponsored, while an IRA is a personal account funded only by the owner.
403b vs. 401k
Other similarities between the 401k and 403b include:
- A similar cap on how much one can contribute. Employees in either plan can defer up to $19,500 per year, with a combined total of employee and employer contributions not exceeding $57,000 ($63,500 if over age 50).
- Both plans will allow employees age 50 and over to defer up to an additional $6,500.
- Both plans offer Roth options, which are after-tax contributions, rather than before-tax. This helps people who expect to be in a higher tax bracket at the time they retire.
- Both plans allow employers to match an employee’s contribution, usually between 3 and 6 percent of the employee’s pay.
Some differences between the 401k and 403b include:
- Depending on the employer, there are fewer investment choices available with a 403b account.
- Many 403b plans allow one to become vested (or, own the account) over a shorter period than 401k plans, sometimes immediately.
- Employees with 15 or more years of service with certain nonprofits or government agencies can make EXTRA contributions to a 403b plan, up to $3,000. This is not offered with 401k plans.
- Some 403b plans are not protected by the Employee Retirement Income Security Act, (ERISA), which means they may not be secure from creditors.
Is a 403b a Good Investment For Me?
Possibly, if you are working for a nonprofit company. Yes, if your nonprofit employer will match your contributions.
However, be careful about putting your 403b monies into an annuity. Once the only option for 403b plans early on, annuities carry high fees and limited success as investment vehicles. Today, 403b monies will fare better in mutual funds, since these funds are cost-effective and allow the investor more control to move them around.
When choosing investment options for retirement, consult your financial planner to determine what retirement plans are best for you.
If you have more questions about what is a 403b or need retirement planning advice, keep reading here, or contact us for a complimentary meeting.