Plan and Retire

Is a 403(b) Plan a Good Way to Save for Retirement?

Suncoast Trust and Investment Staff

September 17, 2021

Teacher smiling

I teach at a school that offers a 403(b) plan. Is this type of plan a good way to save for retirement?

In general, yes. Also known as a tax-sheltered annuity, a 403(b) plan is an employer-sponsored plan designed for employees of certain tax-exempt organizations (e.g., hospitals, churches, charities, and public schools) to invest for their retirement. Typically, the employer purchases annuity contracts or sets up custodial accounts for eligible employees who choose to participate. A 403(b) plan is technically not a qualified plan, but it is said to mimic a qualified plan because it shares some of the same features.

Like a 401(k) plan, a 403(b) plan enables you to make contributions to the plan on a pre-tax basis. These are known as salary-reduction contributions because they come from your salary before taxes are withheld, thus reducing your taxable income. For tax year 2021, you are allowed to defer up to $19,500 a year or 100% of your compensation, whichever is less, to the plan. If you're 50 or older, you can make an extra "catch-up" contribution of $6,500 in 2021 (additional special catch-up contribution rules may also apply). Employers will sometimes contribute to the plan as well, although employer contributions are generally not required and (if made) may be subject to a vesting schedule before you are entitled to them. Earnings (e.g., dividends and interest) on your 403(b) plan investments accrue tax deferred. Only when you withdraw your funds from the plan do you pay income tax on contributions and earnings. If you wait until after you're retired to begin withdrawing, you may be in a lower tax bracket.

The combination of pre-tax contributions and tax-deferred growth creates the opportunity to build an impressive retirement fund with a 403(b) plan, depending on investment performance. You may even qualify for a partial tax credit for amounts contributed if your income is below a certain level. In addition, a 403(b) plan may allow you (under certain conditions) to withdraw money from the plan while still working for your employer. Beware of these "in-service" withdrawals, however. They may be subject to both regular income tax and (if you're under age 59½) a 10% early withdrawal penalty. A plan loan, if permitted, might be a better way to obtain the cash you need.*

Note: Your employer may also allow you to make after-tax "Roth" contributions to your 403(b) plan. Because your Roth contributions are after tax, those contributions are always tax free when distributed to you. But the main attraction of Roth 403(b) contributions is that the earnings on your contributions are also tax free if your distribution is "qualified." In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 403(b) contribution, and you are either 59½ or disabled when you receive the payment.


Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021

IMPORTANT DISCLOSURES Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual's personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Find a Branch or ATM

We’re local, serving multiple counties in Florida