What's a 403(b)?

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

A 403(b) is, like the 401(k), an employer sponsored and administered retirement savings plans. The big difference between the two is that 403(b)s are only offered by public schools or non-profit organizations with 501(c)(3) tax status. (Oh, and they’re also available to ministers — at least those who haven’t gotten God-administered retirement plans. We kid, Reverend!)

Like 401(k)s, these plans offer what’s called tax-deferred contributions, meaning that any money you put into the plan over the year will not be treated by the government as taxable income — so, for example, anyone with a $75,000 income putting away $5,000 of her income, will only be taxed on $70,000. Unfortunately, the government has a long memory and will take its taste when you withdraw the funds in retirement — hence the term “deferred.” Employees may deposit up to $18,500 of their income into a 403(b), and those over 50 in catch-up mode can add up to $6,000 to the account on top of that.

As if this immediate tax bill savings wasn’t enough to convince you of the plans’ irresistibility, most 403(b)s also come with free money in the form of employer contributions. Employers will either kick in a percentage of whatever you contribute — called matching funds — or will provide a set amount regardless of whether you contribute or not, a number usually based upon your salary.

There is one downside to 403(b)s — since the plans are employer sponsored, you don’t have free reign to decide how to invest your money. You may either advise your employer to deposit your money into an annuity contract from an insurance company or else choose to invest in their selection of mutual funds. Should you leave your job, you can roll over your 403(b) into a traditional IRA, which will allow you unfettered freedom to invest any way your heart desires.

Last Updated December 19, 2017

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