403(b) Retirement Plans Explained Simply.
There are many different ways that you can save for retirement without hiding cash under your mattress. One of the most common ways is with a saving account through your work: aka, a “defined contribution plan.”
Simply put, a defined contribution plan is a company savings account that your employer provides to you, the employee, as an easy way to save for retirement. While there are several different types of defined contribution plans, Asurea specializes in 403(b) plans.
In this article, we’re going to focus on 403(b) plans by answering five commonly asked questions about this type of retirement plan.
403(b): What You Need to Know
1. What is a 403(b) retirement plan?
It is a plan that is designed specifically to serve employees of social service agencies, libraries, public schools, churches, colleges and universities, as well as certain tax-exempt or non-profit organizations, such as charities and hospitals. A 403(b) plan is meant to help you save for retirement by setting aside a portion of your paycheck on a pre-tax basis (you won’t pay taxes until you use the money).
2. Why should I participate in a 403(b) retirement plan?
Because everyone needs to save for retirement! Participating in a 403(b) retirement plan makes it easy for you to save and grow your retirement savings while earning interest over time. Some employers may even match your contributions up to a certain dollar amount or percentage, allowing you to save even more. This means, if you put $100 per month in your 403(b) plan, your employer may also put $100 per month in – totaling $200 worth of retirement money saved each month!
3. Are there tax benefits to a 403(b) plan?
You bet! Remember, the contributions that you make to your 403(b) retirement plan are with pre-taxed money. So, the contributions you make will actually lower the amount of your take-home pay and reduce the amount of your taxable income. This means that Uncle Sam will have less money to tax you on! For example, if your pay before taxes is $500 and you contribute $100.00 to your 403(b) account, you’ll pay income taxes on $400.00 not $500.00.
Sure, you’ll have to pay taxes when you withdraw your money in retirement, but by then, most of us will find ourselves in a lower tax bracket because we won’t be bringing home a paycheck.
4. What if I need my money sooner?
If you have an emergency and need to withdraw some or all of your money, some plans may allow you to take out a loan. But, like most retirement savings accounts, the goal is to save and grow your money so that it’s there for you to use and enjoy in your golden years. To discourage plan participants from withdrawing money early, many 403(b) plans charge penalties if you take money out before age 59 ½, and you’ll also have to pay income taxes on any money that you receive.
Check with your plan administrator before taking out cash from your 403(b) plan and what your loan options are.
5. What happens to my money if I change jobs?
If you leave your current employer, you basically have three options:
- You can leave the plan with your previous employer in a type of custodial account (they manage it for you). It will continue to earn interest, but you’ll no longer be able to contribute to the account.
- You can roll it over to your new employer’s plan such as a 401k (if they offer one), or transfer the money directly into an individual retirement plan (IRA) or into an annuity. Keep in mind that money moved from your 403(b) plan must be transferred or rolled over directly into the new account (versus withdrawing the money and depositing it yourself), in order to avoid taxes and penalties.
- You can withdraw your money, but you’ll pay taxes as well as any penalties if you are younger than age 59 ½.
Because tax laws for specific retirement accounts can change from year to year, visit the IRS website for more information on the rules and guidelines regarding 403(b) retirement plans.
Your Simple Solution for Retirement Planning
We hope this helps answer some of your 403(b) retirement planning questions. But if you have more, the experts at Asurea are standing by to help! In fact, we’ve made it our mission to provide Simple Solutions for many of life’s retirement planning mysteries, so that you can make the right choice in saving for your golden years (and ditch the whole mattress thing)!
Contact Asurea today to see whether a 403(b) plan is right for you.
Asurea offers Life Insurance, Mortgage Protection Life Insurance, Medicare Supplement Insurance, Final Expense Insurance, Disability Insurance, Long-term Care Insurance, Retirement Planning products and more. For additional information, click on the ‘Learn More’ button below. Want to have articles just like this delivered to your inbox? Just enter your email address in the box below and click ‘Subscribe.’
This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice. Consult with financial planning, tax, and legal advisors to determine if a 403(b) is suitable in your financial situation. Not FDIC insured, not bank guaranteed, not deposits, are insured by any federal government agency, are a condition to any banking service or activity and may lose value. Dollar amounts are for illustrative purposes, not actual.
Always read any proposed contract carefully and be sure all of your questions are clearly answered before making any decisions.
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