|I teach at a school that offers a 403(b) plan. Is this type
of plan a good way to save for retirement?
In general, yes. Also known as a tax-sheltered annuity, a
403(b) plan is an employer-sponsored plan designed for employees of certain
tax-exempt organizations (e.g., hospitals, churches, charities, and public
schools) to invest for their retirement. Typically, the employer purchases
annuity contracts or sets up custodial accounts for eligible employees who
choose to participate. A 403(b) plan is technically not a qualified plan, but
it is said to mimic a qualified plan because it shares some of the same
Like a 401(k) plan, a 403(b) plan enables you to make
contributions to the plan on a pre-tax basis. These are known as
salary-reduction contributions because they come from your salary before taxes
are withheld, thus reducing your taxable income. For tax year 2018,
you are allowed to defer up to $18,500
a year or 100% of your compensation, whichever is less, to the plan. If you're 50 or older, you can make an extra "catch-up" contribution
in 2018 (additional special catch-up contribution rules may also apply).
Employers will sometimes contribute to the plan as well, although employer
contributions are generally not required and (if made) may be subject to a vesting schedule before you are entitled
to them. Earnings (e.g., dividends and interest) on your 403(b) plan
investments accrue tax deferred. Only when you withdraw your funds from the
plan do you pay income tax on contributions and earnings. If you wait until
after you're retired to begin withdrawing, you may be in a lower
The combination of pre-tax contributions and tax-deferred
growth creates the opportunity to build an impressive retirement fund with a
403(b) plan, depending on investment performance. You may even qualify for a
partial tax credit for amounts contributed if your income is below a certain
level. In addition, a 403(b) plan may allow you (under certain conditions) to
withdraw money from the plan while still working for your employer. Beware of
these "in-service" withdrawals, however. They may be subject to both regular
income tax and (if you're under age 59½) a 10% early withdrawal penalty.
A plan loan, if permitted, might be a better way to obtain the cash you need.
Note: Your employer may also allow you to make after-tax "Roth"
contributions to your 403(b) plan. Because your Roth contributions are after tax, those contributions are always tax free when distributed to you. But the main attraction of Roth 403(b) contributions is that the earnings on your contributions are also tax free if your distribution is "qualified." In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 403(b) contribution, and you are either 59½ or disabled when you receive the payment.