How To Set Up 403b Retirement Plans

How Much Should I Invest In My 403

If your employer offers a match, you should at least invest enough to take full advantage of that free money! For example, lets say your employer offers a dollar-for-dollar match on up to 5% of your $50,000 salary. If you invest up to the match, thats an extra $2,500 your employer contributes to your 403 on top of what you invest yourself. Thats a no-brainer!

What about after you take advantage of the match? You should aim to save 15% of your income toward retirement, but does all of that need to be in your 403? It depends. Here are a couple options to think about:

• Option 1: You have a Roth 403 with great mutual fund choices. This makes everything super simple. If youre happy with your plans investment options, you can invest your whole 15% in your Roth 403. Done!
• Option 2: You have a traditional 403. Invest up to the match, then work with your financial advisor to open up a Roth IRA and max it out if you can! If you still havent hit 15% after maxing out your Roth IRA, you can go back to your traditional 403 and bump up your contributions until you do.

When in doubt, just remember this general rule of thumb about investing: Match beats Roth beats traditional. But above all, the best way to make sure you have enough for retirement is to keep putting money into your 403 month after month, year after year. Youve got this!

Aim For Contribution Limits

The contribution limits for 401 and 403 plans are the same and set at $19,000 for 2019. If you are fifty or older, you can also make catch-up contributions of up $6,000, for a total of $25k in investments each year. Aiming for these limits can boost your retirement savings significantly.

Many people only work to maximize their employers matches, but your contributions dont have to stop there. If you have been contributing to your 403 plan for at least fifteen years, you are also eligible to make catch-up contributions of up to $3,000 per year with a lifetime limit of $15,000. You dont have to be older than 50 to make these catch-up contributions.

Dont Invest In 403 Annuities

Many 403 plans offer annuities in addition to mutual funds. Investing in these are not recommended, however, as they often charge high fees, which limits their investment performance. With annuities, you may also have to pay surrender charges if you transfer assets out of the annuity before the end of the investment period.

403 annuities are also considered complex investments, and if the annuity is variable, you can end up losing money.

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How Does A 403 Plan Work

10 Min Read | Jul 21, 2022

If you work for a non-profit or tax-exempt organization, you mightve noticed that somethings missing from your retirement options. Wait a minute, you say to yourself, why isnt there a 401 option in here?

Thats because most teachers, government employees, nurses, doctors and others who spend their careers serving others have access to a different plan altogether. Its called the 403.

If youre not sure what it is or how it works, the 403 is an employer-sponsored investment account that helps you save for retirement. It works almost exactly the same as a 401with a few minor differences here and there.

Dont worry, well walk through all the nuts and bolts of the 403 together.

How To Enroll Or Make Changes Throughout The Year

Review information on enrollment deadlines and view step-by-step SRA enrollment instructions. See Temporary Staff Members for enrollment instructions if you are a temporary employee.

Contributions are taken from each bi-weekly and monthly paycheck. However, contributions are not taken from off-cycle paychecks.

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How Do You Establish A 403

Simply contact any reputable investment agency such as Merrill Lynch, Dean Witter, etc. Find an investment counselor that you want to work with and tell him you want to set up a 403-b pension plan. Your investment counselor will give you the name and address where the church should direct the contributions. Beginning January 1, 2009, churches are required to have a plan document for your 403-b plan. The plan document is a lengthy and detailed document. Because of the many details that need to be included, the document will need to be mostly written by your investment agency. This requirement is making it difficult for some pastors to find an investment agency willing to set up their 403-b. You should find an investment agency to set up a 403-b for you without requiring you to hire a TPA . We recommend two investment agencies. Either one of these will be able to get your plan document up and running. These two agencies are also able to designate your housing allowance for you once you begin to receive distributions from the 403-b.

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What Are The Advantages Of A 403 Plan

Earnings and returns on amounts in a regular 403 plan are tax-deferred until they are withdrawn and tax-deferred if the Roth 403 withdrawals are qualified distributions. Employees with a 403 may also be eligible for matching contributions, the amount of which varies by employer.

Many 403 plans vest funds over a shorter period than 401s, and some even allow immediate vesting of funds, which 401s rarely do. Certain nonprofits or government agencies also allow employees with 15 or more years of service to make additional catch-up contributions. Under this provision, you can contribute an additional $3,000 a year up to a lifetime limit of $15,000 and, unlike the usual retirement plan catch-up provisions, you don’t have to be 50 or older to take advantage of this.

Finally, certain 403 plans are not required to meet the onerous oversight rules of the Employee Retirement Income Security Act.

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Advantages Of 403 Plans

• A 403 plan allows you to save on a tax-advantaged basis, deferring taxes on your income and any investment earnings or enjoying a tax-free benefit, depending on which plan you select.
• 403 employer contributions may vest faster than in 401 plans.
• If you are no longer with your employer, 403 rules may be more flexible than 401 early withdrawal rules.
• You can contribute more to a 403 plan each year than you can to an IRA.

Who Can Participate In A 403 Plan

Only employees of specific public and nonprofit employers are eligible to participate in 403s, as are some ministers. You may have access to a 403 plan if youre any of the following:

An employee of a tax-exempt 501 nonprofit organization

An employee of the public school system, including state colleges and universities, who is involved in the day-to-day operations of the school

An employee of a public school system organized by Indian tribal governments

An employee of a cooperative hospital service organization

A minister who works for a 501 nonprofit organization and is self-employed, or who works for a non-501 organization but still functions as a minister in their day-to-day professional life

Employers may automatically enroll employees in a 403, though employees can opt out if they so choose. Of course, participating in an employer-sponsored retirement plan is one good way to start saving for retirement.

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Mutual Of America Understands

our mission and actively works to support it with flexible plan design, attractive pricing and value-added services that help maximize the value of this benefit and drive better outcomes for our organization and our employees.”

– Jo-Ann Wallace, President and CEO of the National Legal Aid & Defender Association

How The 403 And 457 Plans Work

The 403 Plan and 457 Plan are supplemental retirement plans that allow you to save up to the IRS limits for additional savings. The balance youll have at retirement is determined by your contributions, plus accumulated earnings on those amounts. The plans generally work the same the major difference is in how the plans consider and penalize withdrawals.

• Withdrawals are permitted after youre no longer working for USG
• If youre no longer working for USG, you must begin receiving distributions by April 1 following the later of year of retirement or attainment of age 70½, if you were born on or before July 1, 1949 or age 72, if you were born after July 1, 1949
• Distributions for unforeseen emergencies are permitted
• Early withdrawals before age 59½ are not subject to the 10% penalty tax
• In-service withdrawals after age 59½ can be used for TRS service purchase
• In-service withdrawals are allowed at age 59½

Rollovers/transfers

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You Can Often Add Contributions Via The 15

Another huge and unique aspect of 403 plans is that you may be eligible for additional contributions to your plan if you have been with the same organization for 15 years and haven’t contributed past the cutoff point before . Employees who qualify for this exception need to refer to the IRS Publication 571 to determine how much additional contributions they may be allotted.

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Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our reporters and editors focus on the points consumers care about most how to save for retirement, understanding the types of accounts, how to choose investments and more so you can feel confident when planning for your future.

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Choosing How Much To Contribute

You make your voluntary contributions as a payroll deduction. You can change the amount once per pay period.

• You may start contributing as low as 1% of salary per pay period up to 80% of salary per pay period.
• The IRS limits how much you can contribute to a 403 plan. The IRS limits for 2022 are as follows:

• The limit reflects your total 403 contributions, whether pre-tax, Roth after-tax or a combination.
• If you would like to contribute your maximum IRS limit on a pre-tax basis, you may enroll in the automated maximum program. This program will calculate your maximum contribution for the year and at the beginning of each year will adjust your deduction amount to reach that maximum limit.

Whats The Difference Between A 401 And 403

As youve probably figured out by now, the 401 and 403 are pretty much the same thingtheyre just a different part of the tax code! The only real difference between these two plans is who has access to them.

While 401s are offered to employees at most privately owned businesses, 403s are only offered to nonprofit, religious, school district and government workers.

Beyond that, there are some other minor differences we’ve already talked about. For example, 401 plans usually have more investing options to choose from than 403s.

But 403 plans often come with shorter vesting schedules, which means you wont have to wait long before your employer match is truly yours. And the 15-year rule allows long-tenured employees to invest even more of their hard-earned salary for retirement.

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What Types Of Investments Go In 403 Plans

One way 403 plans diverge from other retirement plans, like 401s and even IRAs, is how the organization invests funds. Whereas other retirement plans allow account holders to invest in stocks, bonds, and exchange-traded funds, 403s commonly invest in annuity contracts sold by insurance companies.

Part of the reason these plans are known as tax-sheltered annuities is that they were once restricted to annuity investments alonea limit removed in 1974. While many 403 plans still offer annuities, they have also largely embraced the portfolio model that 401 plans typically offer.

Know When To Withdraw

The best time to withdraw from your 403 plan is after you turn 59.5 years old, since that is how long it takes to withdraw your funds without a penalty. Of course, if you have a regular 403 plan, you will be taxed upon withdrawal of your distributions , so it is good to know what tax bracket you fall into when you decide to withdraw your funds. You’ll be taxed at income tax rates for your withdrawals.

However, if you have a Roth 403, you may not be penalized for withdrawing early since contributions are made after-tax. And, you won’t be taxed when you withdraw.

Still, early withdrawals may be permissible under certain circumstances, like if you retire before 55 and comply with IRS regulations when making withdrawals, or medical expenses surpass 7.5% of your gross income, among other exceptions.

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How Much Can You Contribute To A 403

In 2022, workers can put up to $20,500 into a 403 plan without paying taxes on it. Workers whove been with their employer for 15 years may be able to contribute an additional $3,000 and those age 50 or older can contribute an additional $6,500.

You can contribute to your 403 through automatic paycheck deductions. This process is similar to how it works with a 401the employee agrees to have a certain amount of their salary redirected to the retirement plan during each pay period.

However, other types of contributions are also eligible, including:

Nonelective contributions from your employer, such as matching or discretionary contributions

After-tax contributions can be made by an employee and reported as income in the year the funds are earned for tax purposes. These funds may or may not be designated Roth contributions. In this case, the employer needs to keep separate accounting records for Roth contributions, gains, and losses

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Want To Set Up A 403 Plan For Your Nonprofit Organization

Human Interest has helped several eligible small businesses to set up, implement, and maintain a 403. Weâll take care of creating participant accounts, processing contributions every pay period, syncing them with your payroll provider, and ensuring that all compliance testing and paperwork is completely taken care of.

Who Doesnt Qualify For 403 Plan Participation

Employers must offer 403 coverage to all qualifying employees if they offer it to one, known as universal availability. However, plans may exclude certain employees, including those under the following circumstances:

Employees working fewer than 20 hours per week

Employees who contribute $200 or less to their 403 each year

Employees who participate in retirement plan, like a 401 or 457 of the employer

Employees who are non-resident aliens

Employees who are students performing certain types of services

However, the same laws that allow these coverage limits also require employers to meet non-discrimination standards. They require employers to give employees notice of specific significant plan changes, like whether or not they have the right to make elective deferrals.

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Difference Between 401 And 403 Retirement Plans

The biggest difference between 401 and 403 retirement plans comes down to your employer. While a 403 can only be set up through a 501 nonprofit, a 401 plan can be set up by any type of business, such as a sole proprietorship, partnership, limited liability company , corporation and tax-exempt organization.

Both 401 and 403 participants may roll over and simultaneously convert their rollover-eligible assets from their qualified retirement plan to a Roth IRA. This is commonly referred to as a “direct conversion” to a Roth IRA.

Before 2008, 403 retirement plan participants were required to roll over their assets to a traditional IRA and then complete a traditional IRA to Roth IRA conversion. This multi-step process can now be completed in a single step by contacting the plan administrator or with an Edward Jones financial advisor. The participant’s pretax amounts that are rolled over or converted to a Roth IRA must be included in a participant’s income in the year of distribution or conversion.

401s and 403s also have similar contribution limits and catch-up amounts for participants older than 50.

Looking For A Retirement Plan Loan

When bills or debt feel overwhelming, it can be tempting to consider borrowing against your account in a 403, 401 , or 457 plan. But the trade-offs can be steepand we want to make sure you understand them.

In the long run, you may pay more than the loan amount you withdraw, including:

• any initial set-up and quarterly loan fees,
• taxes you pay on the money you use to repay your loan, and
• interest paid to yourself based on loan interest rates over time.

In addition, you may miss out on some potential growth and compounding of your earnings, which can be a major advantage of long-term savings in an account under 401 , 403, or 457 plans.

To give you an idea, $20,000 in a 401 , 403, or 457 account could triple in 20 years at an average 7% rate of returnbut not if you withdraw it today.2

1 IRS annual limits for 2022.

2 Information is for illustrative purposes only. The retirement balance assumes a 7% annual rate of return on their savings. The assumed rate of return for the analysis is hypothetical and does not guarantee any future returns nor represent the return of any particular investment. Contributions do not take into account the impact of taxes on pre-tax distributions. Individual results will vary. Participants should regularly review their savings progress and post-retirement needs.

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