What is the 403(b) Retirement Plan? – Overview

Even though the 401(k) is the most common retirement account in the United States, not everyone has access to such a plan.

Those who work for governments, schools and non-profit corporations don’t have access to an employer-sponsored 401(k).

If you don’t have access to a 401(k), you can, of course, open an IRA.  However, the contribution limits are fairly low, which can be discouraging if you want to contribute a higher amount toward a successful retirement.

The good news is that many hospitals, schools, non-profits (including churches), and governments have their own retirement account offering: The 403(b).

What is the 403(b)?

Basically, the 403(b) is similar to the 401(k).

These plans are employer-sponsored and many of them come with employer matches for your money.

Prior to 1974, 403(b) plans all invested in annuities.  However, many now offer the ability to invest in funds that invest in stocks and bonds.  You can still find 403(b) plans that are heavy on annuities, though, if that is what you are looking for.

As with the 401(k), contributions to a 403(b) are generally made with pre-tax dollars.

This means that you receive a reduction in your taxable income for the year in which you make your contribution.  Later, when you withdraw the money, you pay taxes on the amount distributed from your account.  If you withdraw the money before age 59 1/2, you will pay a penalty to the IRS.

Many 403(b) plans also come with loan options, so you can borrow the money from your plan as long as you comply with certain standards.

In addition to a “regular” 403(b) plan, it is worth noting that there are some employers that also offer Roth versions of the plan.  That way, you can contribute after-tax dollars, and then watch your money grow tax-free — so you don’t pay taxes on your distributions later.

Due to recent changes in the law, 403(b) plans are mostly subject to the Employment Retirement Income Security Act (ERISA), so you have many of the same protections 401(k) holders have been taking for granted for years.

Contributing to a 403(b) Plan

In some cases, you can’t contribute to a 401(k) plan unless you meet certain requirements for time at a company.

For the most part, these requirements are not in place for 403(b) plans.

In most cases, you can start contributing almost immediately.  “Universal availability” applies to 403(b) plans, and employers who provide matching must almost always apply to those who are 21 years or older, or who works 1,000 hours or more per year.

Your own salaried contributions are yours immediately, while different rules might apply to vesting when it comes to the employer’s match.  Make sure you learn the vesting rules before you sign up for an employer match.  [Vesting basically means you have to be at an employer a certain amount of time before the money “vests” or is yours to take if you leave the company or retire.]

The main exceptions to the universal availability of the 403(b) in a workplace come into plan if you:

• Are a nonresident alien
• Plan to contribute less than $200 a year
• Normally work less than 20 hours a week
• Participate in a different employer-sponsored plan

For the most part, though, if you work for an employer that offers a 403(b) plan, you can become involved quite quickly, and if you leave the employer, and begin working with another employer without 403(b) eligibility, there are rollover options.

Contribution Limits

The contribution limits on 403(b) plans are similar to those for 401(k) plans.

For 2011, the limit is $16,500 a year.  For 2012, it was recently announced that the new limit will be $17,000.
Catch up contributions for both 2011 and 2012 remain at $5,500 a year for those aged 50 and older.  This catch-up contribution provides workers a chance to boost their retirement accounts if they are worried about growing their nest eggs.

However, the 403(b) has some interesting additions to the contribution limits.

For those who have served 15 years or more in an organization, there is an extra catch-up allowance, as well as employee elective deferral opportunities.  Note that any aged-50 catch-up amount applies to the 403(b) only after these “extra” contribution limits are reached.

Bottom Line

For most employees that don’t work for institutions that are eligible for 401(k) accounts, there are usually options.

403(b) plans exist to provide a tax-exempt retirement account option for those who work in hospitals, governments, schools and non-profits.  Clergy can also take advantage of 403(b) plans, when they might not have access to 401(k) plans.

As always, though, you need to make sure you understand the rules.

While it’s fairly safe to assume, in most cases, that the rules are the same for a 403(b) as they are for a 401(k), there are still some differences.  If you have questions, you need to speak with your plan administrator, and do your best to determine what options your plan has for investing, and the rules associated with contributions, vesting and loans.

For those who have a 403b, what do you think of the plan?