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  • Writer's pictureWealth Legion


A 403(b) plan is a type of retirement savings plan available to employees of certain tax-exempt organizations, public education institutions, non-profit organizations, and some religious organizations in the United States. These plans are similar to 401(k) plans offered by private employers but are specifically designed for employees of certain tax-exempt entities.

Here's how a 403(b) plan generally works and its key rules:

Employee Contributions: Employees can contribute a portion of their salary to the 403(b) plan on a pre-tax basis. This means the contributions are deducted from their paycheck before taxes are calculated, reducing their taxable income for the year. The maximum contribution limit is set annually by the IRS.

Employer Contributions: Some employers may also make contributions to their employees' 403(b) plans, either as matching contributions or non-elective contributions. However, unlike some 401(k) plans, employer contributions in a 403(b) plan are often less common. Investment Options: Participants in a 403(b) plan typically have a range of investment options to choose from, such as mutual funds, annuities, and sometimes employer stock. The specific investment options available may vary depending on the plan provider chosen by the employer.

Tax Deferral and Withdrawals: Contributions and investment earnings in a 403(b) plan grow tax-deferred until withdrawn. Withdrawals are generally taxed as ordinary income and may be subject to a penalty if taken before age 59½, with certain exceptions.

Required Minimum Distributions (RMDs): Participants must start taking required minimum distributions from their 403(b) accounts at age 73, unless still employed by the organization sponsoring the plan.

Changes for 2024: 403b contributors can now save up to $23,000 per year from their earned income.

Now, let's consider how a teacher named Monica might use a 403(b) plan:

Monica, a teacher at a public school in Las Vegas, decides to participate in her school district's 403(b) plan to save for her retirement. She opts to contribute a portion of her salary to the plan each month, choosing from the investment options available in the plan, such as mutual funds or annuities. Monica's contributions are deducted from her paycheck before taxes are calculated, reducing her taxable income.

Over the years, Monica's contributions, along with any potential employer contributions and investment earnings, grow tax-deferred within her 403(b) account. As she approaches retirement age, Monica plans to start taking withdrawals from her 403(b) account to supplement her retirement income. She has been working with a fiduciary advisor who helped her understand the rules regarding required minimum distributions and will plan her withdrawals accordingly to avoid penalties. Once Monica retires, she has the ability to roll the money out of the 403b similarly to how one would move a 401k. This could give her more options regarding investment selection and the fiduciary would work to minimize her fees so her money lasts longer in retirement.

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