What Is a 403(b) Plan?
Everyone knows that planning for retirement is important. That's why when you start your first job, you should also start saving for retirement by investing in a 401(k) plan. But some employers do not offer 401(k) plans. They may offer a pension or a 403(b) plan instead.
So what's the difference? A 403(b) plan is very similar to a 401(k) plan. Generally, 403(b) Tax-Sheltered Annuity (TSA) plans are available to employees of some nonprofits, hospital organizations, and public education institutions.
Just as with a 401(k) plan, you will have the option to choose to invest in conservative, middle or high-risk investments. Your employer may also offer a match for your investments.
How Much Should I Contribute to a 403(b)?
The average goal for most people is to save around 15% of their income for retirement each year. Worth noting: Your employer match also counts towards that total.
On that note, you should always take full advantage of your employer match if you have one since it's basically free money, earmarked for your retirement. When you are investing for retirement, a good plan of action is to invest in your 403(b) the full amount that your employer matches, then max out your IRA contributions. Then, if you still have funds you'd like to invest in your retirement, return to your 403(b) until you've reached the 15% goal.
Other tips to invest in your 403(b) effectively:
- Start by contributing up to your employer match.
- Each time you get a raise, increase the amount of your contribution.
- If you are paying off debt, decrease your contributions until the debt is paid off, but don't stop contributing altogether. Then, once you've completed your debt payoff plan, increase your contributions.
Should I Choose High Risk or Conservative Investments for My 403(b)?
When you are in your 20s, it makes more sense to choose higher risk investments. The rate of return on these investments is higher than the conservative investments. When you are young, you can afford to ride out the market. This means you will have a chance to recover if the market drops.
However, as you near retirement age, you should begin transferring your funds to more conservative investments. You can re-balance your 403(b) portfolio by talking to a human resources representative at your company. You may also choose to seek the advice of a financial advisor. It is important not to panic if your portfolio drops due to a market dip. This is common, and if you are several years away from retirement, your portfolio should have time to recover.
Other tips on how to invest in your 403(b):
- Think about how much you are willing to risk and how long until you retire.
- Monitor your account, but try not to panic if the market dips.
- Be sure to adjust your portfolio as you get closer to retirement age.
Can I Choose Between a 403(b) or a 401(k)?
Your employer will determine the type of plan that it offers you. This means you will not have an option to choose a 403(b) or a 401(k).
Yet, the rules for the plans are basically the same. You can contribute the same amount to each plan each year. You have the same rollover rules, and similar rules when it comes to being vested in the plan. The withdrawal penalties are also the same.
You also may consider a traditional IRA or a Roth IRA as a means of additionally padding your retirement fund.
Should I Save for More than Just Retirement?
If you want to build wealth, you will need to save more than just the money you put toward retirement each year. You should have regular savings goals that you set for yourself. These goals should include an emergency fund, a down payment for a home, and money for your children’s education in the future.
After those goals are met, you may want to save up for larger projects around your home, or maybe even your dream vacation. You may also choose to invest in real estate or to put additional money in the stock market. However, keep in mind that real estate is a risky investment.
Other tips on how to grow your net worth:
- Make retirement savings a priority.
- If you plan on retiring early, you will need to build investments that you can draw on before you reach retirement age.
- Consider talking to a financial adviser to set up a plan that will allow you to reach your goals on your timeline.
What Happens If I Change Jobs?
Once you are vested in your 403(b) plan, you can take the money with you when you change jobs. You will likely need to roll it over in an IRA account. If you are not vested, you will lose your employer’s contributions, but you will keep the money that you have put into your retirement plan yourself.
Some employers will require you to roll over the account, others will allow you to stay with the current plan as long as you have a specific amount in the account. If you have any questions, your human resources representative should be able to answer your questions or connect you with someone who can.
Updated by Rachel Morgan Cautero.