A 403(b) plan is a retirement plan, similar to a 401(k) plan, for employees of public schools, nonprofits, and religious institutions. 403(b) plans resemble 401(k) plans because they have comparable structure, contribution limits, and eligibility criteria. But they also differ from their 401(k) counterparts in some respects. For example, they allow higher contribution limits and have a different menu of investing products as compared to 401(k) plans. Have questions about 403(b) Plans? Click here. 403(b) plans are meant for employees of public service institutions and nonprofits. They are salary deferral plans that may or may not have matching contributions from employers. Employees
in public school systems and nonprofits, including religious
institutions, are eligible for 403(b) plans and they can contribute up
to a maximum of $23,000 in 2024. Employer contribution to 403(b) plans is elective, meaning they can choose to not contribute towards the plan. The
maximum combined amount of contributions from employers and employees
for a 403(b) plan is $69,000 in 2024. 403(b) plans are subject to the 15-year rule. According
to this rule, employees who have worked at an institution for 15 years
or more can make contributions of $3,000 per year for up to 5 years to
their 403(b) plans. Employees above the age of 50 can make catch-up contributions of $7,500 in 2024. Just like 401(k) plans, 403(b) plans also offer account holders the opportunity to make withdrawals after 59.5 years of age. Early withdrawal before the eligible age results in a 10 percent penalty plus taxation of income at prevailing rates. Account holders can take loans against the assets in their account or hardship distributions from it. While they seem similar, 401(k) plans and 403(b) plans have important distinctions. Perhaps the biggest difference lies in the institutions that use them. 401(k) plans are used at private, for-profit companies while 403(b) plans are offered to employees of school districts and government employees. Other important differences between the two types of plans are outlined below. Many of the advantages and disadvantages of 403(b) plans are the same as those for 401(k) plans. For example, both offer tax benefits and the convenience of investing in financial products to grow your retirement income. The advantages of 403(b) plans over 401(k) plans are outlined below. The
main disadvantage of 403(b) plans is that they have less investment
choices for account holders who might be interested in trading through
their retirement accounts in order to avoid capital gains taxes. In the main, 403(b) plans are populated with annuity products from insurance companies. While such products offer predictable and guaranteed income, they lack the returns available from trading products, such as mutual funds and stocks. What Is a 403(b) Plan?
Basics of 403(b) Plans
Differences Between 401(k) and 403(b) Plans
The
non-discrimination test is conducted annually by the IRS for 401(k)
plans to ensure that highly-compensated employees do not end up
benefitting from retirement plan through greater tax benefits.
If an employer makes a matching contribution, then 403(b) plans are subject to the same tests as regular 401(k) plans.
403(b) plans are also known as tax-sheltered annuity plans (TSAs) because of the preponderance of annuity plans, which offer annual payments, offered by insurance companies in such plans.
401(k) plans are generally offered by mutual and index fund administrators, which leads to a larger variety of investing products, across multiple geographies, on offer for investors.Advantages and Disadvantages of 403(b) Plans
403(b) Plans FAQs
A 403(b) plan is a retirement plan, similar to a 401(k) plan, for employees of public schools, nonprofits, and religious institutions. 403(b) plans resemble 401(k) plans because they have comparable structure, contribution limits, and eligibility criteria.
403(b) plans have fewer investment options as compared to 401(k) plans. They also set a much higher contribution limit and are not subject to non-discrimination testing.
Employees in public school systems and nonprofits, including religious institutions, are eligible for 403(b) plans and they can contribute up to a maximum of $23,000 in 2024.
Just like 401(k) plans, 403(b) plans offer account holders the opportunity to make withdrawals after 59.5 years of age. Early withdrawal before the eligible age results in a 10 percent penalty plus taxation of income at prevailing rates.
Employer contribution to 403(b) plans is elective, meaning they can choose to not contribute towards the plan. The maximum combined amount of contributions from employers and employees for a 403(b) plan is $69,000 in 2024.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
