Who Should Have a 403(b) Retirement Plan?
Certain Persons May Benefit from This Retirement Savings Option
Apr 9, 2009
The 401(k) is an employer-sponsored retirement savings plan that allows employees to save money for retirement by deferring a certain percentage of the employee’s salary toward contributions. Retirement savings from the 401(k) is tax-deferred, meaning the person is taxed only at the time of withdrawal after age 59-1/2. However, there’s a similar retirement savings option for certain persons: the 403(b).
What Is a 403(b) Retirement Plan?
Like the 401(k), the 403(b) retirement plan allows employees to save money for retirement by deferring a selected percentage of the employee’s salary toward contributions. Employers may also provide matching on their 403(b) retirement plans. However, there’s one key difference: the 403(b) is targeted specifically toward non-profits, educators, and ministers including:
- healthcare organizations and hospitals
- churches and religious organizations
- colleges and universities
- tax-exempt 501(c)(3) organizations
Retirement savings from the 403(b) are tax-deferred, meaning taxes is paid only at the time of withdrawal after age 59-1/2. However, as of January 1, 2006, employees can opt to participate in a Roth 403(b). The Roth 403(b) acts similar to a Roth 401(k) or Roth IRA in that distributions are tax-free when the person reaches the age of 59-1/2, and the account has been active for five years.
What Percentage of Income Should an Employee Contribute to a 403(b) Retirement Plan?
When electing to participate in an employer-sponsored 403(b) retirement plan, the employee must decide upon a percentage of income to set aside for retirement. Younger workers should try to get as close as possible to maxing out their 403(b) contributions without impacting their take-home salary. However, mid-career professionals may opt to contribute around 8-10 percent for 403(b) contributions up to $16,500 ($22,500 if 50 or over) in 2009.
The 403(b) retirement plan also contains a unique provision called the lifetime catch-up. The lifetime catch-up is available to employees who have reached their 15th year of service and have contributed an average of less than $5,500 per year to their 403(b) plan. Participants can contribute up to $3,000 in 2009 on top of the normal contribution limit, up to the lifetime catch-up limit of $15,000.
The Bottom Line on 403(b) Retirement Plan
Bottom line, employees of churches, healthcare organizations, colleges, universities, and tax-exempt 501(c)(3) organizations should strongly consider participating in a 403(b) retirement plan starting as early as possible. Those who anticipate being in a higher tax bracket upon retirement (including doctors and university professors) may want to consider a Roth 403(b) for its tax-free withdrawals. Like the 401(k), the key to a comfortable retirement is saving early and retiring late.
See related articles, “Retire Tax Free With a Roth IRA," "How Much Money is Needed for Retirement?," and "Retirement Planning for the Self-Employed."
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