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.
2022 403(b) Contribution Limits
The maximum amount an employee can contribute to a 403(b) retirement plan for 2022 is $20,500, up $1,000 from 2021. If you're 50 or older, you can contribute an additional $6,500 as a "catch-up" contribution, bringing your contribution total to $27,000.
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.
15-Year Catch-up Contributions and Employer Contributions to 403(b)s
For 2022, the combined employee and employer contribution limit for a 403(b) is $61,000 for workers under age 50, an increase of $3,000 from the previous year. The limit for those 50 and older is $67,500. That means an employer can contribute up to $40,500 to a worker’s account if the worker has maxed out his or her contribution.
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. For example, a 45-year-old teacher with 15 years on the job could contribute as much as $23,500 in 2022 ($20,500 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. But again, most K-12 school districts don't offer this 15-year service rule.
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.
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.
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.
Jackie Stewart is the senior retirement editor for Kiplinger.com and the senior editor for Kiplinger's Retirement Report.
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