Teachers : Five things you should Know about a 403(b)

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  • What are 403(b) plans?

403(b) plans are tax-deferred retirement saving plans, invented in 1958, for government or nonprofit charitable organizations and schools for additional earning after retirement. Traditional contributions are pretax, meaning you don’t have to pay taxes on your contributions until you start taking it out as income in retirement. However, Roth 403(b) plans are post tax, meaning you pay taxes now but once you retire the income is now tax-free.

  • Pros of 403(b) Plan

This plan helps teachers or educators to save money and build assets for retirement in a unique way. It provides additional retirement security to the teachers. The contributions are made directly from the salaries, and there is less tax deduction in the 403(b) plan because you aren’t taxed on your contributions until retirement. Thus, it is known as tax-sheltered annuities and referred to as RSAs. All those who are working in public education, healthcare, and law enforcement organizations can have it. It is designed for nonprofit companies and exempted from nondiscrimination testing. In addition, there are 401(k) plans for private, profitable companies. The 403(b) plan is for public school employees. For an educator, they are additional plans other than the state pension to fill the income gap the pension leaves behind. A 403(b) is a valuable financial asset for teachers as retirement savings. In this way, teachers are able stay in the lower tax bracket. It is an easy way to grow savings because there aren’t any taxes on the monthly contributions you make. Starting early in a plan can help you save more and capitalize on compounding interest. If a person leaves or changes jobs, you can roll over into another plan and avoid investing with higher costs. There are guarantees of 100% protection against loss. As well as in most cases an immediate sign up bonus and market gain after joining the plan.

  • The Cons of 403 (b) Plan

The cons of the 403(b) plans are; the government penalizes 10% money as a deduction if you take out money before maturity, even at 59 and 1/2 years of age just like a 401(k).

  • 403 (b) Plan 401 (k) plan 

403(b) is cheaper than 401(k) plans and offers mutual funds and annuities. You can borrow $50,000 or half of the saving balance for a house loan. You have to pay back the loan within five years duration. People can have both plans 403(b) and 401(k) at the same time to boost their savings and have the same rules. A 403(b) reduces the contribution to 401(k). For example, if your deferral is $19,000, if you put $5000 in a 401(k), you can only contribute to $14000 to 403(b). It is an easy way to invest for retirement to fill the income gap the state pensions leave behind. It is possible to switch from the current 403(b) account to another vendor in your district. If you lose your job, you can withdraw money from your employer account without any deduction. Plans are on an individual basis while the employer and employee or both make the payment.

  • Conclusion

A good 403(b) offers low investment, passive income, and a wide range of assets variety. It should be covered by ERISA that provides a helpful safeguard to employees. Always consider the pros and cons before deciding to participate in a 403(b) plan.

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