A 403(b) retirement savings plan is a tax-advantaged defined-contribution retirement vehicle designed for certain employees of public schools and other tax-exempt organizations. It's similar to a 401(k) plan, but with some key differences. In this article, we will discuss the basics of the 403(b) plan, including its definition, eligibility requirements, contribution limits, and investment options.
Eligibility Requirements
To be eligible for a 403(b) plan, you must be an employee of a public school or other tax-exempt organization, such as a church or hospital. Some private companies also offer 403(b) plans to their employees. The plan is available to both full-time and part-time employees, and there is no minimum age requirement for participation.
Contribution Limits
The contribution limits for a 403(b) plan are similar to those of a 401(k) plan. In 2022, the maximum contribution limit is $20,500 if you are under age 50. If you are over age 50, you can make catch-up contributions of up to $6,500, bringing your total contribution limit to $27,000. However, if you have at least 15 years of service with your employer, you may be eligible to make additional catch-up contributions of up to $3,000 per year, for a total of $33,000.
Investment Options
A 403(b) plan offers a wide range of investment options, including mutual funds, annuities, and exchange-traded funds (ETFs). Some plans also offer target-date funds, which are professionally managed portfolios that automatically adjust their asset allocation based on your age and retirement date.
Plan Fees
Like any retirement plan, a 403(b) plan has fees that can impact your returns. These fees can include administrative fees, investment management fees, and transaction fees. It's important to read the plan's prospectus and understand the fees associated with each investment option.
Plan Loans and Hardship Withdrawals
In some cases, you may be able to take out a loan or make a hardship withdrawal from your 403(b) plan. However, these should be considered as a last resort, as they can have significant tax consequences and may impact your retirement savings.
Recent Changes to the 403(b) Plan
In December 2022, Congress passed the SECURE 2.0 Act, which includes several provisions that impact the 403(b) plan. One of the most significant changes is the expansion of the individually designed retirement plan determination letter program to include certain hybrid plans, including 403(b) plans. This change will make it easier for plan sponsors to ensure that their plans are in compliance with IRS regulations.
Another change included in the SECURE 2.0 Act is the requirement for 403(b) plans to allow long-term, part-time employees to participate in the plan. Previously, these employees were often excluded from participating in the plan, even if they had been with the employer for many years.
Conclusion
A 403(b) plan can be a valuable retirement savings tool for non-profit employees and educators. It offers tax-deferred savings, a wide range of investment options, and contribution limits that are similar to those of a 401(k) plan. However, it's important to understand the plan's eligibility requirements, investment options, and fees before enrolling. Additionally, recent changes to the plan, such as those included in the SECURE 2.0 Act, may impact your retirement savings strategy.
