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Typically, at for-profit companies their retirement savings accounts (like a 401k) are outsourced by a designated provider. With your 403(b), things are a little different.

403(b) Explained in 50 Words

A 403(b) plan is a retirement plan similar to a 401(k) plan, but offered through a tax- exempt organization. With a 403(b) plan, employees defer a portion of pretax salary into an individual account, often matched by a specified employer contribution. Funds grow tax deferred; money is not taxed until withdrawn.

How They Work

Employees of public school systems, state colleges and universities, and tax-exempt organizations (such as charities and hospitals) can maximize retirement savings in a 403(b) plan by starting early, contributing as much as possible, and taking full advantage of any employer matching funds.

You can defer a percentage of pre-tax salary up to the annual limit ($20,500 in 2022, or $27,000 for those over 50). Withdrawals are taxed as ordinary income. There is a 10% penalty on withdrawals before age 59½ (with some exceptions). Minimum annual distributions are required each year, usually beginning the year after you turns 72.

Tax deferral has a significant impact on the overall growth of retirement accumulations. In addition, many retirees enjoy a lower tax bracket during retirement. This means retirees will pay lower faxes on withdrawals than they would have paid on the original contributions.

What’s Unique About 403(b)s

With 403(b) accounts, YOU can choose your plan provider from an extensive list of approved providers. The list of your available providers is something you can take a look at. With our experience, we’ve seen that roughly 80% of 403(b) providers are insurance-based companies seeking commissions through selling you a TSA (tax-sheltered annuity).

This means that in addition to annual reviews that you have revisiting your retirement accounts & retirement plan, it’s important to make sure you know exactly where your retirement savings are being invested in, by checking the details on your provider.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.