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Understanding 403(b) Retirement Plans For Churches, Non-Profits And Schools

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Understanding 403(b) Retirement Plans For Churches, Non-Profits And Schools

If you’re a nonprofit worker, you may get a 403(b) plan to save for retirement. However, most retirement content focuses on the more common 401(k) plans offered by most companies. Although 403(b) plans are similar in some ways and have the same basic purpose, it’s important to understand what makes 403(b) plans unique.

tax-deferred savings

Perhaps the best thing about a 403(b) plan is that it’s a tax-deferred way to save for retirement. You can usually deposit into your 403(b) plan tax-free. This contrasts with the rest of your income, which may be subject to income tax. When your money is taxed, you keep more money and it can grow faster.

The money in your 403(b) can usually grow tax-free until retirement. After retirement, you may be taxed on the money you withdraw from your 403(b) plan. Still, there’s a good chance you’ll be in a lower tax bracket in retirement, and of course you’ll benefit from your money growing tax-free until then.

A lot of people like this setup, and it’s worth noting that if you think your income tax rate will increase significantly between now and retirement, or if your income tax is very low now compared to retirement, then the 403(b) plan is attractive to you Force may be reduced. Not much to gain here, though. The government wants people to save for retirement and has created a 403(b) plan to encourage it.

403(b) plans vary in quality

Unfortunately, the quality of 403(b) plans does vary. The best plans include a range of low-cost exchange-traded funds (ETFs). This means you can build a portfolio that meets your needs, or just hold a low-cost target date fund to handle portfolio construction for you.

In general, you want your ETFs to have fees below 0.5% and mainstream asset classes below 0.2%. Most ETFs just track an index, which doesn’t require any skills, so you shouldn’t overpay as performance is unlikely to improve, in fact, according to most academics, with higher fees it will only erode your Save, it may worsen learning.

However, the less attractive 403(b) can include things like annuities and insurance. Unfortunately for the people who sell you products, these may be better than your retirement prospects. You may need to be cautious if these products are offered. Better investment products usually don’t involve salespeople, so if they do, that’s a red flag.


Another important thing to check is whether your 403(b) plan is covered by ERISA (Employees Retirement Income Security Act of 1974), which can be good news if so. ERISA is a set of basic standards established by the Department of Labor, which means the program is more likely to be administered in a way that is more in your interest.

If your 403(b) is not subject to ERISA, there are fewer safeguards and your 403(b) may contain products that are more cost-effective for the salesperson than for you. Without ERISA protection, you are more on your own. So if you have a 403(b) plan that is not covered by ERISA and you are selling things like annuities and insurance under that plan, you may need to be cautious.

Don’t assume a 403(b) plan not covered by ERISA is considering your retirement needs.

How to Invest in a 403(b) Plan

If you’re trying to save for retirement and you see a bunch of exchange-traded funds (ETFs) in your 403(b), it can be confusing. Often choosing a target date fund within 5 years of your estimated retirement date may be a reasonable option. The fund should hold a combination of stocks, bonds and other assets that increase if retirement is a long way off, and then gradually move to safer assets as retirement approaches.

Of course, there’s no guarantee you’ll see great investment performance, but historically, this approach to investing has delivered relatively strong returns over the decades. Again, check the fund’s expenses (expense ratio). Ideally, you want to pay 0.5% or less. This may seem like a small number, but it does add up over time. For example, if you have $500,000 in retirement savings, the 0.5% fee would be $2,500 per year, which would total $75,000 if you had 30 years to retire.

Choosing Your Own Funds in A 403(b)

If you need to choose your own funds then it gets a little complicated. Generally, a diversified international low-cost equity fund with thousands of individual stocks and a diversified bond fund is a good place to start. Your exact mix of stocks and bonds will depend on your risk tolerance and retirement age. 60% stocks and 40% bonds is a fairly generic combination. You can increase the weight of the stock to increase potential long-term returns, although returns can be more volatile. You can also increase the weighting of bonds to make your returns more predictable, but you may also see lower long-term growth. Likewise, funds with lower fees are often a better choice for similar assets.

Employer Match

A final benefit of a 403(b) plan is employer contribution matching. If your employer is willing to push your retirement savings to a certain level, this is usually a good deal. This is basically an added benefit to your employer, and even if your 403(b) isn’t great, saving to an employer match level might be worth considering.

Early Withdrawal and Repayment of Donations

A 403(b) plan can also be more flexible than a 401(k) plan. One useful aspect may be early exits in 403(b) plans. With a 401(k), getting money before retirement can be tricky or expensive. Accessing your funds may be easier with a 403(b). This doesn’t mean you should. Usually, it’s best to use your retirement savings in retirement, but knowing you can use your money is a useful fallback option if you need to.

Second, the amount you can contribute to a 403(b) plan is usually limited, but as retirement approaches, you can make additional contributions if you qualify. If you have a solid 403(b) plan, this can be a great way to increase your savings. This also applies to 401(k) plans.

Therefore, a 403(b) plan is not much different from a 401(k) plan. Often, the overall plan structure and savings options may be similar. However, be careful with insurance and annuity products because depending on your situation, these may not be the best way for you to save for retirement, especially if your 403(b) plan is not covered by ERISA.

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