About 403(b) Accounts
403(b) plans are a type of defined contribution retirement account available to certain employees of schools and various nonprofit organizations, including hospitals, charities and members of the clergy. They're almost identical to 401(k) plans, which are the type used in the for-profit sector, with a few differences. The main differences are that 403(b)s may vest immediately or over a shorter period of time than a 401(k), but sometimes offer fewer investment options.
A 403(b) is a type of tax –sheltered annuity plan, which allows you to invest pretax earnings in a retirement account and allow those funds to grow tax-free as well. You are only taxed on the disbursements you take after retirement, though you'll likely have to pay a 10 percent penalty on any money you withdraw before age 59 ½.
As with a 401(k), your employer can make pretax matching contributions to your account, which you are only taxed on when you make withdrawals.
Another option is a Roth 403(b), in which you make after-tax contributions, but your earnings and eventual withdrawals are tax-free, provided the latter are qualified distributions.
As with a 401(k), there's a limit on how much you can contribute to a 401(b) each year. For 2016, that figure is $18,000, though investors age 50 and older can make an additional "catch-up" contribution of up to $6,000 a year, for a maximum of $24,000.
Those who have worked at the same nonprofit for at least 15 years can make a catch-up contribution of $3,000 a year, regardless of age, provided their previous contributions have averaged less than $5,000 a year.
Note that you typically designate your contributions as a percentage of your salary and not as a figure.
Using the 403(b) Savings Calculator
The calculator will not only take into account your current salary, but also anticipated salary increases and the higher contributions you can expect as a result.
Most of the entries in the calculator are self-explanatory, but the following may be helpful.
- Annual salary : Enter your total pretax salary, before any deductions
- Percent to contribute: The percentage of your annual salary that you are having withheld to invest in your 403(b)
- Current age: How old you are now.
- Age of retirement: The standard age is 65, but playing around with this figure by adjusting the sliding green triangle will give you an idea of the financial impacts of delaying or taking an earlier retirement.
- Current 403(b) balance: How much is currently in your 403(b) account, if you already have one.
- Annual rate of return: The average return on your investments you expect to earn between now and retirement. You may be surprised how much small changes in this figure can change the amount available to you at retirement.
- Annual salary increase: Annual raises will increase the contributions made by both you and your employer to your 403(b).
- Annual investment fee: What your Plan Sponsor charges each year for managing your account. Though the number may seem small, this can have a big impact on the long-term growth of your account, as this comes right off the top of any earnings.
- Total employee contributions: The calculator will determine his for you.
For employer contributions:
- Percent of salary: Your employer's annual match, as a percent of your salary.
- Amount per year: An alternative to the above, if you employer contributes a certain fixed amount rather than a percentage of your salary.
- Total employer contributions: Will be determined by the calculator.
When you are finished, the calculator will show you how much you can expect your 403(b) account to contain at the time your retire. For a more complete breakdown, click "Show report" at the top of the page.