403(b) accounts explained as a way to save for retirement

What are 403(b) plans?

403(b) plans are a way to save for retirement that can provide benefits similar to other retirement investment account options such as 401(k) plans and individual retirement accounts (IRAs). These plans are also sometimes called a tax-sheltered annuity or TSA plan.

403(b) plans are only available to eligible employees at public schools, certain 501(c)(3) tax-exempt organizations, and churches – where offered by the employer. For a traditional 403(b) plan, contributions to the account are typically made on a pre-tax basis from your salary, potentially reducing your tax liability in years when contributions are made and allowing your retirement savings to grow tax-deferred. In most instances, earnings on investments in the account aren’t taxed until they are withdrawn.

How do they work?

These accounts make saving for retirement simple by deducting contributions directly from your paycheck. Employers may even match a percentage of their participants’ contributions, helping to boost retirement readiness. You can then invest your savings in vehicles offered through your plan, options that might include a target date fund or an annuity, to help grow your nest egg.

There are several reasons that help make 403(b) plans a useful tool in saving for retirement, particularly if you take advantage of features that your plan may offer to help maximize savings. The sooner one starts saving in a 403(b) plan, the longer they can take advantage of compounding interest, too.

How much can I contribute?

403(b) plan accounts have higher contribution limits than IRAs. In 2022, you can set aside up to $20,500 in a 403(b) plan account. That limit is re-evaluated annually and subject to annual cost of living increases.

If you are 50 or older, you can contribute an extra $6,500 annually (up to $27,000 total) to your 403(b) account. These “catch-up” contributions can help boost savings as you approach retirement. If you’ve worked for a qualified organization for 15 years or more, you may also be able to make additional contributions of up to $3,000 for up to 5 years.

These increased limits can help boost savings as you get closer to retirement. But you don’t actually have to be behind on your savings goals to take advantage of catch-up contributions - they are just opportunities to save more and take advantage of the benefits your plan offers.

It’s important to note that this general limit is not per account, and applies across some other plan types as well, meaning the limit is reduced by amounts set aside in any 401(k)s, SIMPLE IRAs, and other 403(b) plans.

When can I withdraw from my 403(b) plan?

Generally, withdrawals can begin penalty-free at age 59 ½, upon a severance from employment, disability, or upon meeting other qualifiers determined by your plan. Early withdrawals could result in an extra 10% on top of what you’d normally pay in state and federal taxes.

There may be tax implications to consider as you think about the right time to start using your savings. And once you turn 72, withdrawing a minimum amount annually generally is required. A tax professional or financial advisor can help you build a plan for using your savings that meets your needs.