Millions of public school employees, along with some employees at colleges and universities, hospitals, charities, and other nonprofit organizations, use 403(b) plans to save for retirement.
As is the case with employer-provided 401(k) plans, 403(b) plans are tax-advantaged. Contributions are typically deducted from your paycheck and invested, providing an important source of income in retirement. Pretax contributions will reduce your taxable income, and your investments will grow tax-deferred until you retire. If your plan offers a Roth option, contributions are after-tax, but withdrawals will be tax-free as long as you’re 59.5 or older and have owned the account for at least five years.
And as with 401(k)s, employers may offer a matching contribution to a 403(b) up to a certain threshold (a maximum 3% of your salary, for example). Most public schools don’t offer a match, but if your employer provides one, consider contributing at least enough to earn it.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free 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.
Most pensions for teachers who work 30 years or more replace 50% to 70% of their salary, so a 403(b) can fill the gap, says Dan Otter, cofounder of 403bwise, a nonprofit that advocates for better retirement plans for K–12 teachers. But 403(b)s have some key characteristics that make them unique — and sometimes less than desirable.
Perks and pitfalls of 403(b) plans
Certain benefits that 403(b)s offer aren’t available with other types of employer-provided plans. The regular contribution limit is the same as with 401(k) plans — $23,000 in 2024 for workers younger than 50. And employees age 50 or older can make $7,500 in catch-up contributions to a 403(b) this year, just as those who have a 401(k) can.
But some employers permit longtime employees to make additional catch-up contributions to a 403(b). If you’ve been with an employer for at least 15 years and you’ve made an annual average contribution of less than $5,000 per year, you can contribute an additional $3,000 per year, up to a lifetime maximum catch-up contribution of $15,000.
You can take advantage of the 15-year rule even if you’re younger than 50. For those who are 50 or older, the IRS will apply contributions above the regular limit first to the 15-year rule, then to the standard catch-up contribution limit. If your employer allows these extra catch-up contributions, “they can be a great way to boost your tax-smart retirement savings plan,” says Noah Damsky, a certified financial planner based in Los Angeles.
On the downside, 403(b) plans aren’t subject to the Employee Retirement Income Security Act (ERISA), which means employers don’t have the same fiduciary obligations as companies that offer 401(k) plans, Otter says. As a result, many teachers are offered anywhere from 20 to 100 different plans, often provided by insurance agents promoting high-cost variable annuities, says Nicholas Bunio, a CFP based in Philadelphia.
Though many 403(b) plans have lackluster offerings, the problem really lies with plans for employees in K–12 public schools, he says. In 2022, the Securities and Exchange Commission fined Equitable Financial $50 million for providing misleading statements and omitting information about fees for variable annuities it sold to investors, most of whom were teachers and other school staff.
You can find out which school districts are doing right by their employees with 403(b) plans by using the search tool at www.403bwise.org/education/vendor-search-tool. If your only option is a plan filled with high-cost products, consider investing in a Roth IRA instead.
Note: This item first appeared in Kiplinger's Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related Content
-
Original Medicare vs Medicare Advantage Quiz: Which is Right for You?Quiz Take this quick quiz to discover your "Medicare Personality Type" and learn whether you are a Traditionalist, or a Bundler.
-
Ask the Editor: Capital Gains and Tax PlanningAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on capital gains tax rates and end-of-year tax planning
-
Time Is Running Out to Make the Best Tax Moves for 2025Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
Original Medicare vs Medicare Advantage Quiz: Which is Right for You?
Quiz Take this quick quiz to discover your "Medicare Personality Type" and learn whether you are a Traditionalist, or a Bundler.
-
Time Is Running Out to Make the Best Moves to Save on Your 2025 Taxes
Don't wait until January — investors, including those with a high net worth, can snag big tax savings for 2025 (and 2026) with these strategies.
-
4 Smart Ways Retirees Can Give More to Charity, From a Financial AdviserFor retirees, tax efficiency and charitable giving should go hand in hand. After all, why not maximize your gifts and minimize the amount that goes to the IRS?
-
I'm an Insurance Pro: If You Do One Boring Task Before the End of the Year, Make It This One (It Could Save You Thousands)Who wants to check insurance policies when there's fun to be had? Still, making sure everything is up to date (coverage and deductibles) can save you a ton.
-
Should You Tap Your Home Equity Before 2026?As borrowing rates and tax law shifts converge, here's what homeowners need to know before pulling equity out of their home.
-
My Adult Child Was Laid Off. Can We Discuss It Without Ruining the Holidays?We asked mental health and financial experts for advice.
-
3 Year-End Tax Strategies for Retirees With $2 Million to $10 MillionTo avoid the OBBB messing up your whole tax strategy, get your Roth conversions and charitable bunching done by year's end.
-
'Politics' Is a Dirty Word for Some Financial Advisers: 3 Reasons This Financial Planner Vehemently DisagreesYour financial plan should be aligned with your values and your politics. If your adviser refuses to talk about them, it's time to go elsewhere.
