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403B Retirement Plan

403(b) Plans

It's up to you to make sure you'll have a comfortable retirement. In many instances, Social Security will not provide you with as much money as you were earning before you retired. Also, many Americans are living longer, healthier lives and may need a bigger nest egg in their retirement years. 403(b) plans can help you save the money you'll need.

Who is eligible for a 403(b) plan? Employees of most tax-exempt groups such as hospitals, social service agencies, libraries, K-12 public schools, colleges and universities may participate in 403(b) plans. Check with a benefits specialist where you work to learn what your employer offers.


A 403(b) retirement plan (named after a section of the federal tax code) allows employees of eligible employers to build retirement savings by setting aside a portion of their pay on a pre-tax basis. If you participate in a 403(b) retirement plan, you agree to have your employer take the money out of your earnings before you receive them and before you pay taxes on them. Your employer may elect to match all or a portion of your contribution. You will not be taxed on the money invested (by you or your employer) in a 403(b) retirement plan—or the gains on that money—until you withdraw the funds, usually at retirement. This is a tremendous advantage to you because all the earnings that would have been paid as taxes can continue to grow in your retirement plan year after year.

You will choose where to invest your money from among the vendors listed by your employer. Choices will likely include fixed annuities, variable annuities, and mutual funds. You should evaluate the performance and cost of several options before making a decision. You may want to get advice from a benefits specialist or tax professional to help you evaluate the options.

When you turn 59½, you can access the money in your 403(b) retirement plan without penalty. You will be taxed at your ordinary income tax rate, which may be lower when you retire. Before 59½, your access to the funds and any earnings invested in a 403(b) retirement plan is restricted. Except for special circumstances, withdrawals made prior to age 59½, are generally subject to a 10 percent tax penalty and ordinary income taxes. Check with your tax advisor regarding tax rules that may apply to you.



  • Your annual gross income is reduced by the amount you contribute to your 403(b) plan. This is called a pretax contribution. Pretax contributions can greatly reduce your tax
    bill. For example, if you contribute $100 a month to a 403(b) plan, your monthly gross income will be reduced by $100. If you are in a twenty percent tax bracket, you will pay $20 less in taxes every month, so your $100 investment would save you $20 in current taxes. Note however, your Social Security (FICA) taxes are based on your gross income, notwithstanding any deferrals. When you take payments, they are subject to income taxes.

  • Your earnings are tax-deferred. That means the interest, dividends, or capital appreciation you earn on your 403(b) plan contributions will not be taxed until you start withdrawing money, generally at retirement.

  • Automatic payroll deductions make saving for retirement easy. You're less likely to miss money you never see.

  • Contributions to a 403(b) plan will not reduce your Social Security benefit.

  • Some plans have loan features that let you withdraw money (without tax or penalties) as a loan. Of course, you will be charged interest on the loan, and failure to pay the
    loan back within the agreed-upon terms may result in adverse tax consequences.

  • Your employer may contribute to your 403(b) plan. Employer contributions and earnings on your 403(b) account grow tax deferred. Since employer contributions and earnings are not
    taxed until they are withdrawn, your account balance may grow more quickly.

May I Participate in a 403(b) If I Participate in Other Plans?

If you already participate in a defined contribution plan (e.g., 401(k) plan) you may still be able to contribute to a 403(b) plan. You will need to check with your benefits specialist or tax professional to find out what's allowable in your specific situation. If your employer is eligible but does not have a 403(b) plan available, ask your benefits specialist about starting one.



Your employer's 403(b) plan will allow you to contribute up to a certain percentage of your before-tax pay. Of course, 403(b) contributions may not exceed what you earn. Additionally, if you are age 50 or older, you are allowed to make "catch-up" contributions. That is, you are allowed to contribute extra amounts over and above your before-tax 403(b) contribution limit. Also, your employer may make contributions. Therefore, your individual 403(b) contributions plus contributions you employer makes can add up to $53,000 (in 2015) or 100 percent of your compensation, whichever is less.

The table below shows the maximum dollar amount the law allows you and your employer to contribute. Each year, your 403(b) contribution limits will be increased periodically to allow for inflation.

Year Your Contribution
Total Contribution (You + Employer)
2015 $18,000 $53,000

There are specific exceptions. To be certain how much you can contribute, ask a tax professional or a benefits specialist in your organization.



You have two funding options in a 403(b) plan: annuities and mutual fund custodial accounts. Annuities are financial contracts with an insurance company that can be used to accumulate assets for retirement or to provide you with a stream of income in the future, usually when you retire. Annuities may be fixed or variable. A custodial account is one where an agent, bank, or other financial organization holds your account for you. If you fund your 403(b) account with mutual fund investments, your employer will set up a custodial account for you.

Both variable annuities and mutual funds carry investment risk. That risk will vary with the investment decisions you make. Keep in mind that with any investment there is a risk-reward relationship. In general, the lower the risk, the lower the return. With higher investment risk, there is the potential of higher return.

Variable annuities and mutual funds are offered with a document called a prospectus. The prospectus for a variable annuity describes the features, risks, charges and expenses of the contract. A separate prospectus provides additional information for the mutual fund investments available in a variable annuity contract and their investment objectives, policies and risks. Publicly available mutual funds available through a custodial account are also offered with a prospectus that describes their charges, expenses, investment objectives and policies as well. This and other information is available in the prospectus, which you should read carefully before investing.



There are two types of annuities. Fixed annuities provide you with returns at a pre-determined interest rate and the principal is guaranteed.* Variable annuities yield a return that varies with the success of the investments you choose, from among those made available by the insurance company under the variable annuity contract. Thus, the rate of return from a variable annuity may be higher or lower than a fixed annuity. In a variable annuity, your contributions are not guaranteed.

Fixed annuities are contracts that pay a fixed-rate interest for a set period. The issuing insurance company guarantees these annuities; thus, the advantage of fixed rate annuities is that they have lower risk and a predictable payout. On the other hand, inflation may erode the earning power of a fixed-rate instrument. Before you buy a fixed-rate annuity, be sure to check the financial health of the issuing company. Its ability to make good on your investment is crucial. Financial ratings of insurance companies are available from rating services such as Moody's, A.M. Best and Standard & Poor's.

Variable annuities. The variable annuity contract offers a variety of investment options. Although the investment options in a variable annuity contract may have names, investment objectives, and management that are identical or similar to publicly available mutual funds, they are not those mutual funds. They most likely will not have the same performance experience as any publicly available mutual fund. Generally, the variable annuity contract will offer a range of investment or funding options from which you may choose. Your choices may include stock, bond, or money market funds.

Your principal and the return you earn are not guaranteed; they depend on the performance of the underlying investment options. If the investment options you choose for your annuity perform well, they may exceed the inflation rate or fixed annuity returns. If they don't perform well, you may lose not only any earnings you've made, but even some of your principal.

Some variable annuities offer a fixed account option, in addition to the variable investment options, that is guaranteed by the issuing insurance company.

*Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.



Money market mutual funds are a relatively low-risk mutual fund investment that offers lower returns. Money market mutual funds can only be invested in certain short term, high quality investments issued by the US government, state and local governments, banks and blue-chip companies. Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although they seek to preserve the value of your investment at $1.00 per share, it is possible to lose money with money market mutual funds. They are not generally recommended as investments for 100 percent of your retirement money unless you are very close to retirement age.

Bond mutual funds typically invest in government or corporate bonds, or a combination of both. Government bond mutual funds can invest in U.S. Government, state government, or local government bonds. Corporate bond mutual funds invest in a variety of bonds from companies across the country or around the world.

Bond mutual funds are subject to the performance of the bonds in their portfolio, and risk varies according to investment strategy. Generally, funds holding bonds with longer average maturity periods have higher yield potential and higher risk.

Bond mutual funds with a shorter average maturity are generally lower risk investments. Bond funds are subject to interest rate risk (when interest rates rise bond prices fall and vice versa); inflation risk (an increase in inflation may erode the purchasing power of your investment); and income risk (income from bond funds may decline when (1) bonds mature and are replaced with bonds offering lower coupon payments, (ii) a bond issuer does not repay interest and/or principal in a timely manner, and (iii) a fund’s earnings are reinvested).

The bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and financial condition of the issuers of bonds.

Independent agencies such as Standard & Poor's and Moody's rate bonds in the marketplace according to default risk. Scales differ, but ratings generally run from AAA (high quality), down to C (lowest quality), or D (in default). Examine the ratings of the bonds in any mutual fund you are considering for investment.

Stock mutual funds are usually invested in various publicly traded stocks. A stock mutual fund’s value can rise or fall quickly over the short term; historically, though, stocks as reflected in the performance of stock market indices (which do not have investment management fees and other expenses) have performed better over the long term. There is no guarantee, however, that any particular stock or group of stocks will perform better over the long term than other types of investments. Stock prices fluctuate for a wide range of reasons, and stock mutual funds are subject to the same market risk as stocks. Not all stock mutual funds are the same or have the same level of risk.

Most stock mutual funds fall into one or more of the following categories.

  • Index mutual funds attempt to mirror the performance of stock market indexes, such as the Dow Jones Industrial Average or the Standard & Poor's 500 Composite Stock Price Index (S&P 500). They do this by investing in all (or a representative sample) of the companies included in the index. Investing in an index mutual fund reduces the risk that the fund portfolio will be subject to poor investment decisions. The downside to these mutual funds is that they're managed for average performance, so they rarely perform significantly better than the market in general.

  • Growth mutual funds invest in companies that have better-than-average growth potential over time. The earnings of these companies, and therefore their stock values, are expected to increase. Growth mutual fund investments span a broad range of industries, and may or may not pay dividends. Growth funds are considered higher risk, so expect significant fluctuation in share price.

  • Income mutual funds invest in stocks that have a history of paying regular dividends.

  • Growth and Income mutual funds generally invest in companies believed to have growth potential and a solid dividend payment record. They're designed to help you hedge your bets—even if the share price falls, dividends may offset the loss. Growth and income fall in the middle of the risk spectrum for stock mutual funds.

  • Aggressive Growth mutual fund portfolios include stocks of start-up companies, smaller businesses or firms in high-risk industries. These stocks may be volatile and should be purchased by those with a higher risk tolerance.

  • International mutual funds generally invest in stocks or bonds of non-U.S. issuers. Investors in these funds are taking on a high degree of risk, since the portfolios could be affected by political unrest or currency fluctuations in a foreign country. Often, international mutual funds invest in companies from emerging markets where business is rapidly developing (e.g. Latin America). The potential risks and rewards are very high.

Balanced mutual funds are invested in a mix of stocks and bonds, allowing diversification with potentially lower risks, and lower return potential, than pure stock funds.



Your employer's 403(b) plan will most likely offer you a variety of investment choices. Asking the right questions will help you decide on your best investment strategy.

Have I learned all that I can about each investment? For mutual funds and the investment options within a variable annuity, good sources of information are the prospectus, financial magazines, or your plan administrator. For annuities, rating services such as Moody's, A.M. Best and Standard & Poor's can provide the information you will need to assess the insurance company's financial health.

How has this investment performed in the past? While past performance is never a guarantee of future performance, it will help to give you an idea of how the different types of investments have performed over time in up and down markets.

How long do I have before I’ll need the money? If you can leave money in a 403(b) fund for 10 to 15 years or more, you may be able to ride out the ups and downs usually experienced with stock investments. Over time, stocks (as reflected in stock market indices) have generally outperformed other options.

How should I "mix and match" my investments? Most financial professionals recommend that you allocate your assets to a variety of investments. Put some of your money in conservative investments with stable rates of return and distribute other assets in investments with greater potential for gains and higher risk. Your ideal "mix" will depend on your circumstances, goals, and tolerance for risk.

Am I a conservative, moderate or aggressive investor? Even conservative investments may lose earning power if their growth does not outpace inflation. On the other hand, the winner-take-all attitude of very aggressive investors holds the potential for great loss as well as great gain. To help determine where your tolerance for risk lies, review the statements at right.

  • Conservative or Low-Risk Investor:
    • I don’t want to risk any of my principal.
    • I want a guaranteed rate of interest on my investment. 
    • I am near retirement.
  • Moderate or Medium-Risk Investor:
    • I can live with some ups and downs.
    • I would like a combination of high-risk investments and low-risk investments.
    • I have some time for my money to grow.
  • Aggressive or High-Risk Investor:
    • I have an iron stomach and can handle market swings.
    • I want the highest possible long-term rate of return, even if I risk losing principal. 
    • I have at least 10 – 15 years for my investments to grow.

Whatever your investment philosophy, you should never put money in an investment you don't understand. And, remember to reconsider your investment portfolio periodically. Review it when you experience changes in your life, such as when you get married, divorced, or have a child. It is especially important to examine your investments as you approach retirement age.



All 403(b) investments are subject to various administrative and management fees. These fees come in many forms and can take a significant bite from your retirement nest egg. So, consider the fees of your various investment options carefully.

One advantage of variable annuities is that they may carry a guaranteed death benefit that is paid if you should die prior to taking an income stream under the annuity. Even if the investments within your annuity have lost money, if you have this guarantee, the insurance company promises that when you die your beneficiaries will receive at least as much as you contributed originally; reduced for amounts taken for withdrawals and less any outstanding loans. Some may even guarantee death benefits in excess of the amount you originally contributed.

Depending on the specific conditions of your employer's 403(b) plan, you may be able to borrow funds from your annuity.

Most variable annuities have surrender charges. They charge a fee if you withdraw your money during the early years before your retirement. Many annuities, however, allow participants to switch investment options; e.g., to move a portion of your 403(b) account balance from a stock index funding option to one that invests in growth stocks. Many mutual funds have "loads"—either front or back-end charges that you pay when you contribute to the 403(b) plan or when you withdraw amounts from your mutual fund custodial account. These loads may be waived if your contributions are made through your plan account.

The fees for mutual funds tend to be lower than fees for variable annuities, because there is an additional charge imposed to pay the insurance company for the death benefit guarantee, the right to receive an income stream for life at guaranteed rates specified in the contract, and the guarantee that the insurance company may not increase its expenses under the annuity contract.



  • You are permitted to leave the money in your annuity contract or 403(b) custodial account. This may be convenient, but you will not be able to continue to contribute to the plan.

  • You may be able to roll over your contract to your new employer's plan, e.g., 401(k). Make sure the 403(b) transfer goes directly from your old plan to the new one, to avoid having taxes withheld. Not all employers will accept money from a previous plan.

  • You can roll your money into a separate Individual Retirement Account (IRA) or an Annuity. If you do that, make sure the 403(b) transfer goes directly from institution to institution so you avoid having taxes withheld.

  • One final option is to withdraw the money. You can take your money—in a lump sum—and pay ordinary income tax and any penalties on the amount you withdraw.



Circumstances can arise where you might need the money in your 403(b) accounts before you retire. Options include borrowing from the plan—if permitted—or in the event of hardship, withdrawing money from the plan.

Loans. The IRS permits you to borrow money from your 403(b) accounts. Your 403(b) will have its own rules, however, so you may or may not be allowed to borrow from your 403(b).

If your plan permits loans, you may be able to borrow from your 403(b) accounts without paying any tax or penalty. Loans must be repaid. And regular principal and interest payments must be made.

Hardship Withdrawal. Money can be withdrawn from 403(b) accounts, without penalty, if the participant retires, reaches 59 1/2, becomes disabled or dies. If none of these conditions apply and your plan does not permit loans from your 403(b) accounts, the only way to withdraw money may be through a hardship withdrawal -a special circumstance that has tax consequences. Purchase of a primary residence, college tuition or medical expenses may be considered hardship situations. Plans will allow early withdrawals of your contributions—but not earnings from your contributions. If you qualify for such a hardship exception, you will still pay ordinary income tax and, if you are under age 59½, a 10 percent penalty on the withdrawn funds.



Once you retire, your payout options will depend in large part upon the investments you have chosen. For example, your 403(b) plan could provide a lump-sum payment. With an annuity, you could receive regular payments for a specified period or for the rest of your life. Whatever you choose, remember that you will pay ordinary income tax on your withdrawals; so, taking a lump sum may not be the best way to go in many cases.



Remember that the key to maximizing your 403(b) contributions is to start early and contribute as much as you can. By setting aside the maximum allowed, a 403(b) plan is an excellent retirement option.

All along the way, you will be making choices that can affect your retirement nest egg. Think about the implications for your retirement when you select your plan, when you decide how much to contribute each year, and any time you change your funding option or select a different type of plan.

It's wise, before you change your 403(b) plan, to review your options with a benefits specialist. In some cases, you may want to get advice from a tax professional. Remember: It's your plan and your choices and your retirement.



Helpful Websites
The Internal Revenue Service's Publication 571, Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations, provides a comprehensive discussion of the 403(b) plans including latest changes.
This Department of Labor link provides a good overview on what you should know about your retirement plan.
403(b) Wise provides valuable 403(b) information and education to help make investment decisions, whether directing one's own 403(b) or using the services of an agent or advisor.


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