Public school teachers, church staff, not-for-profit hospital workers and other employees of nonprofits are eligible to sock away thousands of dollars each year in a 403(b) retirement plan at work.
403(b) Contribution Limits for 2019
The maximum amount an employee can elect to contribute out of salary to a 403(b) retirement plan for 2019 is $19,000, up from $18,500 in 2018. If you’re 50 or older, you can contribute an additional $6,000 as a catch-up contribution for 2019, bringing your contribution total to $25,000.
As with a traditional 401(k) account, money going into a 403(b) through payroll deductions hasn’t yet been taxed. The contributions and earnings grow tax-free until you withdraw them—usually in retirement. You can pull money out of the account without a 10% penalty if you’re at least 59 1/2 (or 55 if you’ve left the job). Withdrawals are subject to regular income tax.
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“It’s a vehicle meant for saving for retirement and to cover pension shortfalls,” says Daniel Otter, founder of 403bwise.com, an education and advocacy website about 403(b) plans.
15-Year Catch-up Contributions and Employer Contributions to 403(b)s
Employer contributions to a 403(b) made on top of employee contributions can boost retirement savings significantly. An employer can contribute up to an additional $37,000 to a worker’s account in 2019, but Otter says this is a perk generally offered to employees at public colleges. Very few public K-12 school systems offer any type of 403(b) match to workers.
Some employers also permit both younger and older workers to make catch-up contributions under the so-called 15-year service rule. Under this provision, if you have 15 or more years of service at the same employer, you can contribute an additional $3,000 a year if you have not maxed out your 403(b) contributions in previous years, Otter says. For example, a 45-year old teacher with 15 years on the job could contribute as much as $22,000 in 2019 ($19,000 for the annual contribution plus the $3,000 catch-up contribution). The 15-year service catch-up contribution, however, has a $15,000 lifetime limit.
Again, most K-12 school districts simply don’t offer this 15-year service rule, says Scott Dauenhauer, a certified financial planner and owner of Meridian Wealth Management.
If you need more help in determining your maximum contribution limit, check out Fidelity’s 403(b) contribution calculator.
Best Investments in 403(b)s
Often, 403(b) plans are filled with high-cost annuities and other insurance products. A 2016 report by benefits consultant Aon Hewitt found that participants in 403(b) plans lost a total of nearly $10 billion annually to excessive fees.
“Most public K-12 403(b) plans are filled with products that are sold by sales agents,” says Otter. “Teachers don’t know who to talk to. They need to get self-educated and understand the fees.”
On average, variable annuities charge 2% to 3% annually, compared with 1.05% for mutual funds that invest in large-company stocks and 0.69% for index funds. A 30-year-old teacher saving $3,000 a year, earning an annual rate of 8% and paying a 2.5% yearly fee, would end up with a balance of $309,641 at age 65, compared with $420,787 for the mutual fund and $460,163 for the index fund.
Review your investment options to find the best insurance company or mutual fund provider within your plan to meet your needs. Website 403bcompare.com, which provides information on California 403(b) plans, lists fees, investment options and performance information for plans offered in the state's local school districts. Even if you don’t work in California, the site is a valuable comparison tool because many of the investment companies listed offer similar 403(b) plans in other states.
You can also switch investments and financial firms within your plan. First, stop making contributions. Why? Because each contribution potentially has its own surrender charge, which is a fee you’ll pay if you sell the investment within several years. By stopping contributions, you reduce the amount you’ll pay in surrender charges. Next, take time to figure out the costs and benefits of switching investments, Otter says.
Need help? Get a list of your available investment options and post it on 403bwise.com for feedback. Current and former teachers are on the discussion boards to provide assistance. If you notice any of the big names, such as Fidelity or Vanguard, look into what they have to offer, and keep in mind any surrender charges you may have to pay. It may make more sense to place any new contributions with a new provider and wait to switch the older investment once the surrender charges are less.
Finally, talk to your plan administrator to find out when you can switch. Some plans are liberal and allow employees to switch anytime, whereas others permit changes only once or twice a year.
As an alternative to a 403(b), consider opening a Roth IRA with automatic contributions. You can contribute up to $6,000 a year to a Roth IRA, plus another $1,000 if you’re 50 or older. You can withdraw your contributions at any time without penalty or taxes. You must be at least 59 1/2 and have owned the Roth for at least five years to withdraw earnings free of penalty and taxes.
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