403(b) Plans: A Profitable Savings Plan for Nonprofit Employees
The 403(b) has long been the retirement plan of choice for employees of public schools, universities, and nonprofits. Unfortunately for employees of such institutions, the 403(b) was plagued by an unwieldy set of contribution regulations that often created significant headaches for participants.
That all changed in 2001 with the passage of the Economic Growth and Tax Relief Reconciliation Act, which eliminated most of these complications, and put 403(b)s and 401(k)s on similar footing. In addition, a number of regulatory changes were made in 2007 that required 403(b)s to follow the lead of 401(k)s in providing participants with a greater level of documentation and transparency.
Although 403(b)s and 401(k)s are now much more similar (for instance, contributions are made on pre-tax basis and both have similar contribution limits), there remain three main differences:
  1. Fewer employers offering 403(b)s make matching contributions. That's not a limitation of 403(b)s per se, but rather a function of the not-for-profit nature of the organizations offering these plans.
  2. 403(b)s only can offer annuity and mutual fund products as investment options. A 401(k), however, can offer virtually any tradable security, including stocks, bonds, CDs, structured notes, and self-directed brokerage accounts.
  3. Although both 401(k)s and 403(b)s offer similar catch-up provisions (which allow older workers to contribute more), 403(b)s take it one step further. 403(b)s include a catch-up exception for up to $3,000 for current employees with at least 15 years of service.
These differences don't mean the 403(b) is an inferior plan type. In fact, the 403(b) is an excellent vehicle for retirement saving that offers most of the same benefits of a 401(k).
 
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    403(b) Plan Highlights
    Employee contributions: Pretax contributions; post-tax contributions allowed by some employers, and for the Roth 403(b).
   
    Employer contributions: Optional. Employers typically use a formula to match employee contributions.
   
    Contribution limits: The limit for pre-tax and/or Roth contributions is $ per year. Certain employees may be eligible for additional catch-up contributions. Total contributions–employee's plus employer's–cannot exceed 100% of the employee's compensation, or $49,000, whichever is less.
   
    Early withdrawals: Allowed. Taxes and 10% penalty apply to whole amount, except in IRS-approved situations. Surrender charges for annuity investments also may apply. For Roth accounts, you may be able to withdraw your contributions without taxes or penalty. Please consult a tax adviser.
   
    Loans: Allowed.
    Learn More  
   
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> 401(k) Plans: Match, Point, and Set
> 457(b) Plans: Governing Retirement
 
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