individual 403(b) Account
Background
Laws Financial has nearly 30 years of experience in guiding teachers towards their retirement goals by investing in 403(b) plans. With around a trillion dollars of savings in 403(b) plans, they cover one in five U.S. employees. In order to sponsor a 403(b) plan, an employer must be a public school system, a qualified nonprofit organization, or a religious institution such as a church. Also known as tax-sheltered annuity plans, 403(b) plans allow participants to set money aside in a special account and invest it for their retirement. Participants are offered a fixed menu of investment options.
Individual 403(b) Management
What's the difference between a 403(b) and a 401(k) plan?
While similar, 403(b) plans differ from 401(k) plans in several ways. First, only certain employers are allowed to offer a 403(b) plan. In order to sponsor a 403(b) plan, an employer must be a public school system, a qualified nonprofit organization, or a religious institution such as a church.
Also, the investments that 403(b) plans typically offer are different from what you’ll find in many 401(k) plans. 403(b)s typically utilize annuity contracts from insurance companies. Some plans will offer a wider range of investments, including stock mutual funds.
Finally, 403(b) plans have a special rule that allows additional contributions by some employees who have had at least 15 years of service with their employers.
“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
― Pablo Picasso
What are the tax benefits of using a 403(b) plan?
The reason why 403(b) plans are so popular is that they offer substantial tax benefits. The biggest benefit that 403(b) plans offer is that you’re allowed to make contributions on a pre-tax basis. Therefore, any money you contribute isn’t counted in your taxable income for the year, so your tax bill will be lower by the amount of tax that you would have paid on the contributed amount.
In addition, some 403(b) plans offer what’s known as Roth options. Roth 403(b)s do not give you the tax benefit above: Instead, you’ll contribute after-tax money to the plan. However, in exchange for giving up the immediate tax benefit, you can make withdrawals from the Roth 403(b) account in retirement tax-free. However, not every employer offers a Roth option, so you’ll want to check with your HR department to find out whether you’re eligible.
Once you’ve put money into your 403(b) plan account, the other big benefit is that it grows on a tax-deferred basis. Over the years, your investments inside your 403(b) will typically make payments in the form of interest, dividends, or other types of investment income. In an ordinary account, you’d often have to pay taxes on that income in the year in which you received it. However, because the investments are inside a 403(b) account, you don’t have to pay those taxes along the way.