Retirement savings is a popular topic and most people are familiar with retirement savings plans such as 401(k)s and individual retirement accounts (IRAs). However, employers offer a wide range of retirement savings options beyond 401(k)s and IRAs. One common, yet lesser-known retirement savings plan is the 403(b). Read below and learn the basics of 403(b) plans, the advantages and disadvantages, and how to decide if this is the right plan for you.
The biggest difference between 403(b) plans and other retirement savings plans is that 403(b) plans are only offered by tax-exempt, non-profit organizations such as public schools or other educational institutions, religious organizations, hospitals, government organizations and other approved not-for-profit entities. Also known as the tax-sheltered annuity plan (TSA), investment options in 403(b) plans are generally limited to annuities and mutual funds.
Advantages of 403(b)
The benefits of 403(b) plans closely resemble the chief benefits of 401(k) plans. Both retirement plans provide employees a means to save on a tax-deferred basis, and both allow for employer contribution matching. And as is the case with 401(k) plans, employees may also have the option to borrow against 403(b) savings. The annual contribution limit for a 403(b)s is $19,000 for 2019, which is the same as the limit for 401(k)s in 2019.
An additional advantage of 403(b) plans is that employees who have worked for the same company for 15 years may also qualify for an additional $3,000 in contributions, when certain eligibility requirements are met. Depending on the structure of the 403(b) plan, administrative costs and fees may be lower than that of 401(k)s or the retirement saving options.
Disadvantages of 403(b)
One disadvantage of 403(b) plans is that investment options tend to be more limited compared to other retirement savings plans. As mentioned above, 403(b) plans generally only invest in annuities and mutual funds. For those looking for a wider range of investment options 401(k) plans or IRAs are a better option. In addition, the non-profit nature of employers that offer 403(b) plans means that employees will not benefit from profit sharing as a part of their retirement saving.
Employer contribution matching is one of the biggest benefits of 401(k)s and employers who offer 403(b) plans are allowed to offer contribution matching under IRS rules and guidelines. However, non-profit organizations often do not provide contribution matching to limit government oversight. By contributing funds to employee retirement savings, organizations lose their exempt status from certain government regulations such as the Employee Retirement Income Security Act (ERISA).
Is a 403(b) Right for Me?
Deciding whether or not a 403(b) is right for you is a complex decision. In some circumstances, a 403(b) plan may be the only employer-sponsored retirement savings option for those working for non-profit organizations. For others, employees may have the option between choosing a 401(k) or 403(b). Outside the employer-sponsored options are self-managed retirement plans such as Roth IRAs and Traditional IRAs. Choosing between a 403(b) and other options really comes down to looking at the specifics of the plan offered by your employer. Even if your investment options are limited and your company does not offer employer contribution matching, the low administrative costs and the quality of the annuities or mutual funds available to you may make the 403(b) plan the best option for you.
At Wickham Financial & Insurance Services, our team of advisors has the knowledge and experience to help you compare your retirement savings options and weigh the pros and cons for your situation. We understand that you are on your own unique financial journey, and you need more than a one-size-fits-all approach to your financial planning. Meet with us today to learn how we can help you plan for your future.
Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.