Knowing the 403(b) basics
If you’re one of the millions of hardworking employees at a nonprofit, religious group, school district, or governmental organization, the 403(b) is likely your primary retirement vehicle.
So how does a 403(b) plan work? And—more importantly—how can it help you reach your long-term financial goals?
In the concise primer below, we’ll not only flesh out the basics of the 403(b), but give you solid tips for effectively incorporating it into your retirement plan.
So, you’re eligible…what now?
Whether you’re just starting at your organization or are a long-term employee, it’s important to begin contributing—or contribute the maximum—as soon as possible to make the most of tax-deferred savings.
The reason is simple: Like other tax-deferred savings vehicles, traditional 403(b) contributions—as well as any interest and dividends—grow tax-deferred over time. The subsequent compound interest gained by earning interest on interest encourages your nest egg to grow. An added benefit is shelter from creditors if you run into some financial hiccups down the road.
The 403(b) comes in two varieties: traditional and Roth.
The primary difference? The traditional allows pretax contributions and tax-deferred growth, while the Roth allows after-tax contributions and provides the ability to withdraw your contributions tax-free after a five-year holding period. You can also pair these two together to create more diversification.
How much can you contribute?
You can contribute up to $23,500 of your pretax income into your 403(b) in 2025 —up $500 from 2024 — as well as an additional $7,500 as a "catch-up" contribution if you're age 50 or older. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in most 401(k), 403(b), governmental 457 plans and the federal government's Thrift Savings Plan. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500. Also, an employer match can significantly boost your savings over time so be sure to find out if this option is offered at your workplace. If it is, don’t leave free money on the table!
What can you invest in?
The 403(b) investment options are chosen by your employer and typically include annuities and mutual funds.
An annuity pays out a regularly scheduled stream of guaranteed income at a designated point in the future, while a mutual fund allows you to invest in a wide variety of stocks, bonds or both.
Your investment options depend on the type of 403(b) plan you have—some plans allow you to invest in both annuities and mutual funds. Each plays a different role in a portfolio, but when combined in a 403(b), you get the tax advantages and compounded growth along with the added benefit of diversification and the guarantees provided by the annuity. Remember, guarantees are backed by the claims-paying ability of the issuer.
Your benefits office can help you understand your options and a financial advisor can help you make decisions as you set up your investment elections.
When can you withdraw your nest egg?
Withdrawal rules for the 403(b) are as strict as those for similar pretax retirement plans: The plan only allows penalty-free withdrawals beginning at age 59-1/2.
These rules are in place to help savers stay focused on the long-term. There are, however, circumstances that qualify for early withdrawal without penalty such as to pay for an accident, healthcare or long-term care insurance premiums for certain workers. Check with your benefits office to see if you qualify.
Always think twice before tapping this tax-advantaged plan. After all, you remain liable for any taxes on the withdrawal—in addition to a 10% federal tax penalty if your reason doesn’t qualify—and you will lose out on tax-deferred growth.
For many, investing in a 403(b) is a major component of their retirement plan. If you want to build toward a secure and prosperous retirement, it’s essential to get invested and stay invested. Arming yourself with the right information is the first step in creating a retirement plan that works for you both today and throughout all your tomorrows.
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RO #4011642 ( 11/2024)