Certain employees of schools and other tax-exempt organizations can participate in a 403(b) retirement plan. This includes teachers, professors, school administrators and hospital workers.
The maximum amount an employee can elect to contribute to a 403(b) retirement plan for 2021 is $19,500. If you're 50 or older, you can contribute an additional $6,500 as a "catch-up" contribution, bringing your contribution total to $26,000. These amounts remain the same from 2020.
As with a traditional 401(k) account, money going into a 403(b) through payroll deductions hasn't yet been taxed. The contributions and earnings grow tax-free until you withdraw them—usually in retirement. You can pull money out of the account without a 10% penalty if you're at least 59 1/2 (or 55 if you've left the job). Withdrawals are subject to regular income tax.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"It's a vehicle meant for saving for retirement and to cover pension shortfalls," says Daniel Otter, founder of 403bwise.org, an education and advocacy website about 403(b) plans.
15-Year Catch-up Contributions and Employer Contributions to 403(b)s
For 2021, the combined employee and employer contribution limit for a 403(b) is $58,000 for workers under age 50, an increase of $1,000 from the previous year. The limit for those 50 and older is $64,500. That means an employer can contribute up to $38,500 to a worker’s account if the worker has maxed out his or her contribution.
Otter says this is a perk generally offered to employees at public colleges but very few public K-12 school systems offer any type of 403(b) match to workers.
Some employers also permit both younger and older workers to make catch-up contributions under the so-called 15-year service rule. Under this provision, if you have 15 or more years of service at the same employer, you can contribute an additional $3,000 a year if you have not maxed out your 403(b) contributions in previous years, Otter says. For example, a 45-year old teacher with 15 years on the job could contribute as much as $22,500 in 2021 ($19,500 for the annual contribution plus the $3,000 catch-up contribution). The 15-year service catch-up contribution, however, has a $15,000 lifetime limit.
Again, most K-12 school districts simply don't offer this 15-year service rule, says Scott Dauenhauer, a certified financial planner and owner of Meridian Wealth Management.
Best Investments in 403(b)s
Often, 403(b) plans are filled with high-cost annuities and other insurance products. A 2016 report by benefits consultant Aon Hewitt found that participants in 403(b) plans lost a total of nearly $10 billion annually to excessive fees.
"Most public K-12 403(b) plans are filled with products that are sold by sales agents," says Otter. "Teachers don't know who to talk to. They need to get self-educated and understand the fees."
Review your investment options to find the best insurance company or mutual fund provider within your plan to meet your needs. The website 403bcompare.com, which provides information on California 403(b) plans, lists fees, investment options and performance information for plans offered in the state's local school districts. Even if you don't work in California, the site is a valuable comparison tool because many of the investment companies listed offer similar 403(b) plans in other states.
You can also switch investments and financial firms within your plan. First, stop making contributions. Why? Because each contribution potentially has its own surrender charge, which is a fee you'll pay if you sell the investment within several years. By stopping contributions, you reduce the amount you'll pay in surrender charges. Next, take time to figure out the costs and benefits of switching investments, Otter says.
Need help? Get a list of your available investment options and post it on 403bwise.org for feedback. Current and former teachers are on the discussion boards to provide assistance. If you notice any of the big names, such as Fidelity or Vanguard, look into what they have to offer, and keep in mind any surrender charges you may have to pay. It may make more sense to place any new contributions with a new provider and wait to switch the older investment once the surrender charges are less.
Finally, talk to your plan administrator to find out when you can switch. Some plans are liberal and allow employees to switch anytime, whereas others permit changes only once or twice a year.
As an alternative to a 403(b), consider opening a Roth IRA with automatic contributions. You can contribute up to $6,000 a year to a Roth IRA, plus another $1,000 if you're 50 or older. You can withdraw your contributions at any time without penalty or taxes. You must be at least 59 1/2 and have owned the Roth for at least five years to withdraw earnings free of penalty and taxes.
-
Retirees, It's Not Too Late to Buy Life Insurancelife insurance Improvements in underwriting have made it easier to qualify for life insurance, which can be a useful estate-planning tool.
-
Best Banks for Retirees
banking Kiplinger's 2023 list of the best banks for retirees.
-
As the Market Falls, New Retirees Need a Plan
retirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
-
Retirees: Your Next Companion May Be a Robot
happy retirement Robots may help fill the gap left by a shortage of humans to help older adults live independently.
-
Using Your 401(k) to Delay Getting Social Security and Increase Payments
retirement Your 401(k) can be a bridge from retirement to higher monthly income.
-
How Do I Stop Robocalls From Scamming Me?
retirement The scammers have automated their efforts to separate you from your money. We have ways to make it stop.
-
A Kiplinger-ATHENE Poll: Retirees Are Worried About Money
Making Your Money Last Concerns about recession, inflation and health care costs weigh on retirees and near retirees.
-
Grandparent Scams Get Victims in Their Hearts
Scams If you get a call from someone who claims to be your grandchild in trouble and needing money right away, be wary. Don’t send any money or give any information until you verify the story.
