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In the retirement-savings arena, many people have a basic understanding of IRAs and 401(k) plans, while few are familiar with 403(b) plans. You may be offered only a 403(b) plan at your workplace, and not a 401(k), so let's review the answers to seven frequently asked 403(b) questions.
What is a 403(b) plan?
In a nutshell, 403(b) plans are much like 401(k) plans -- but a little different. They're offered chiefly to those working at schools as well as some other tax-exempt enterprises, including churches. As with a traditional 401(k) plan, you can contribute part of your income to your account on a pre-tax basis, where it can grow tax-deferred until you reach retirement age. For example, if you earn $70,000 this year but contribute $10,000 to your 403(b) account, your taxable earnings shrink by that $10,000. (So, if you're in the 25% tax bracket, you can avoid paying $2,500 on those earnings in the current year.) When you withdraw money from the account in retirement, it will be taxed as ordinary income -- which can deliver an extra benefit if, like many people, you're in a lower tax bracket in retirement.
You may also be allowed to make contributions to your 403(b) account in the manner of RothIRAs or Roth 401(k)s -- on a post-tax basis. That means you contribute money that gives you no upfront tax break, and if you follow the rules, you can withdraw it in retirement tax-free. Check with your employer to see if this option is available to you.
403(b) plans are much like 401(k) plans. Image source: Getty Images.
What are the basic 403(b) rules?
Well, you typically have to work at least 20 hours per week to be eligible to participate in a 403(b). If you're going to do so, you will often need to contribute more than $200per year -- and you can only participate in one 403(b) plan. You also can't participate in a 403(b) plan if you're participating in a 401(k), 457 plan, or 403(b) plan through another employer.
How much can I contribute to one?
The contribution limits to retirement accounts often change from year to year. For 403(b) (and 401(k)) plans, the limit for 2016 is $18,000 -- plus another $6,000 for those 50 or older. That's far more than the current $5,500 or $6,500 limit for IRAs and it makes it easier to accumulate big balances in 403(b) and 401(k) plans. Note, though, that if your earnings are below the limit, then you can't contribute more than your earnings. So if you earn $15,000 in 2016, your maximum 403(b) contribution will be $15,000.
How much can it help me?
With their hefty contribution limits, 403(b) plans can be great helps in building a war chest for retirement. Check out the table below to see how much various annual contributions can grow to over time (assuming an 8% average annual gain):
If you're still many years from retirement, you can amass more than a million dollars in a 403(b) account without even making the maximum allowed contribution!
403(b) plans can grow into large sums. Image Source: Getty Images.
How can I make the most of my 403(b) account?
Contributing generously to a 403(b) account is a good way to build its balance powerfully. It also helps to invest that money effectively. As with 401(k) plans, you're probably offered at least a handful of mutual funds to choose from. Consider favoring stock funds over bond funds for long-term money and aiming to keep your fees paid low, too. Many times, index funds will levy the lowest fees while also growing your money at a reasonably rapid clip.
Another cardinal rule for 403(b) and 401(k) plans is to maximize any matching funds offered by your employer -- because that's free money. For example, imagine that you earn $70,000 and your employer matches every dollar you contribute up to 3% of your earnings. Three percent is $2,100. Contribute that and your employer will chip in another $2,100 -- of free money. That's a guaranteed 100% return that you'd be silly to pass up. (Note that it's more common for companies with 401(k) plans to offer matching contributions, but 403(b)-sponsoring companies still sometimes to match contributions.)
Know that 403(b) plans used to be calledtax-sheltered annuities -- which is why some still permit you to sock some or all of your money into an annuity. Be careful about that, though, as some charge steep fees, limit your gains, and have restrictive terms. Fixed annuities are among the least problematic and most worth considering, if you're interested.
Can I borrow from my 403(b) account?
Some, but not all, 403(b) plans will let you borrow funds from your account. Think twice before doing that, though, because you'll be stopping those dollars from working for you and growing into more dollars. That can derail or really slow down your retirement savings.
Image source: Getty Images.
What happens to my 403(b) account when I change jobs?
Just as with a 401(k) plan, you can typically leave your funds in the plan to keep growing, roll them over into your next employer's plan, roll them over into an IRA, or cash them out. (If you have less than $5,000 in your account, you may not be permitted to leave the money in place.) Many people cash out 403(b) and 401(k) plans when changing jobs, but that's another way to really short-change your retirement. You may think that, say, $12,000 or $27,000 or whatever you have in the fund won't make a big difference, but even a $12,000 balance can grow over time. Adding nothing to it, it can total $38,000 in just 15 years, growing at 8%. If you tend to move from job to job, cashing out your retirement accounts each time is a recipe for retirement disaster. You can probably count on Social Security, but by itself, it's probably not enough to have you living very comfortably.
Don't take your 403(b) plan for granted, and don't ignore it. Make some smart moves today and you'll thank yourself later.
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