Most everyone has heard of a 401(k), but few people are familiar with its lesser-known cousin, the 403(b). The two accounts are similar, but there are a few key differences in eligibility requirements and contribution limits that it pays to understand.
403(b) accounts are available only to ministers and employees of nonprofit organizations, public schools, and certain hospitals. These employers may offer 401(k)s to their employees instead if they choose, but most prefer the 403(b) because of its lower administrative costs. Watch the video below to get a more detailed explanation from our senior advisor:
A typical employee under age 50 can contribute up to $18,500 to a 403(b) in 2018. This limit is the same for 401(k)s. And just like 401(k)s, 4013(b)s allow employees aged 50 and older to contribute an extra $6,000 per year, bringing their total to $24,500. Note that these are the limits for 2018, and they may be subject to change from year to year.
Employers can choose to match your 403(b) contributions just as they would 401(k) contributions. However, don’t expect a dollar-for-dollar match. It’s common for employers to offer a match of $0.50 on the dollar for contributions of up to 3% to 6% of your pay.
The investment options in a 403(b) tend to be similar to those offered by a 401(k). Both are more limited than an IRA, however, so if you want more investment choices, you should consider opening one of these as well.
Like 401(k)s, 403(b)s come in two basic varieties: traditional and Roth. These types are the same except in the way your contributions and withdrawals are taxed (or not taxed). Contributions to traditional 403(b)s are tax-deferred, which means the amount you contribute will come off of your taxable income this year, but then you will be taxed when you withdraw the money from your account in retirement. Contributions to Roth 403(b)s are made with after-tax dollars, so you pay taxes on your contributions, but not on distributions made past age 59 1/2.
There are two ways that clients can compensate rF for their services. Many universities allow us to “fee-billing” for our services. This means that we can directly bill the clients’ accounts, without money having to come directly out of their pockets. However, some universities limit the number of financial companies that can “fee-bill”, thus limiting the options employees have. If you are at a university that limits “fee-billing”, then you can talk to the human resource department (HR) or group the facilitates the 403b about adding us as one of those companies. With enough employees wanting other financial advisory firms, the university is usually willing to listen and add those companies.