Haris Ashley
A 403(b) plan is a retirement plan offered by public schools and certain tax-exempt organizations. Employees can save for retirement by contributing pre-tax dollars to individual accounts, and employers can also contribute to these accounts. Assets in a 403(b) plan can be placed in various investment types, including annuity contracts provided through insurance companies, custodial accounts invested in mutual funds, and retirement income accounts for church employees. While a 403(b) plan offers tax advantages, it may not provide the same level of investment protection as other plans, and certain investments such as individual stocks and real estate investment trusts (REITs) are prohibited. So, are 403(b) investments insurable?
| Characteristics | Values |
|---|---|
| Type of Plan | Retirement plan |
| Who can offer the plan | Public schools, certain 501(c)(3) tax-exempt organizations, churches, charities, non-profits |
| Who can participate in the plan | Employees of the above organizations |
| Type of Investments | Annuity contract, mutual funds, retirement income account |
| Insurability | Cannot be funded with life insurance, endowment, health, accident, or other types of insurance contracts |
| Tax Benefits | Pre-tax contributions, tax-free withdrawals (if certain conditions are met), tax-free growth |
| Investment Risk | All investing is subject to risk, including possible loss |
| Contribution Limits | Annual contribution limits set by the IRS ($23,500 for 2025) |
| Withdrawal Options | Various options for withdrawing money in retirement |
| Loans | Permitted if the plan allows it |
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What You'll Learn
403(b) plan vs 401(k) plan
A 401(k) plan is an employer-sponsored retirement plan offered by many for-profit companies. They are one of the most popular employer-sponsored retirement plans available. They were created in the Revenue Act of 1978 and are named after the section of the Internal Revenue Code that governs them. 401(k) plans often have a wide variety of investment options, including mutual funds and exchange-traded funds (ETFs).
A 403(b) plan is also an employer-sponsored retirement plan, but it is offered by public schools, churches, and 501(c)(3) non-profit organizations. They are very similar to 401(k) plans but are less common. 403(b) plans were created in 1958 and have been expanded and adapted since. They are also named after the section of the Internal Revenue Code that governs them. Before 1974, 403(b) plans were restricted to investing in tax-sheltered annuities, but this restriction was loosened, and now participants can invest in mutual funds as well.
Both plans offer tax advantages and a way to save for retirement. They are both subject to contribution limits, which are currently the same. In 2025, the annual employee contribution limit is $23,500 for both plans, and workers aged 50 and over can contribute an additional $7,500. Those aged 60-63 can contribute an extra $11,250. Additionally, 403(b) plans have another catch-up contribution option: if an employee has worked for the same employer for at least 15 years, they can make an additional contribution of either $3,000 per year up to a lifetime limit of $15,000, or $5,000 times the number of years of service minus previous contributions, up to a maximum of $15,000.
The type of plan an employee is eligible for depends on their job. If an employee has multiple employers, they may have access to both types of plans.
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Annuity contract through insurance company
A 403(b) plan is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees can save for retirement by contributing to individual accounts, and employers can also contribute to employees' accounts.
Assets in a 403(b) plan can be placed in various investment types, one of which is an annuity contract provided through an insurance company. An annuity is a contract issued and distributed by an insurance company and bought by individuals. The purchaser pays a lump sum or regular payments over a period, and the insurance company makes regular payments to the annuity owner in return, either immediately or in the future. Annuities are designed to provide a steady cash flow for people during their retirement years, ensuring they do not outlive their assets.
Annuities are often purchased from insurance companies or other financial institutions by investors, known as annuitants, who want a stable, guaranteed retirement income. The invested cash is illiquid and subject to withdrawal penalties, so annuities are generally not recommended for younger individuals or those with liquidity needs. Annuities are one of the only investments available that can guarantee income for life, and they can also provide a death benefit, allowing the owner to pass on assets to their children or other beneficiaries.
Annuities have complicated tax considerations, and there are often fees and surrender charges associated with them. For example, if you withdraw money before the age of 59 1/2, you may be subject to an additional 10% penalty tax. There are also costs associated with mail and services, investment management, and death benefits. It is important to understand these costs and consult a professional before purchasing an annuity contract.
Different insurance companies offer many kinds of annuity contracts with different features and investment options. The five common types of annuities include immediate annuities, fixed annuities, variable annuities, equity-indexed annuities, and deferred annuities.
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Tax advantages and disadvantages
A 403(b) plan is a tax-sheltered retirement plan for employees of public schools, certain charities, and other 501(c)(3) tax-exempt organizations, including qualified religious organizations. Employees can contribute pre-tax dollars by deferring part of their salary, and employers can also contribute to employees' accounts.
Tax Advantages
B) plans offer tax advantages, enabling you to save on taxes now and in the future. Here are some of the key tax advantages:
- Tax-Deferred Growth Potential: Taxes on any investment earnings in a traditional 403(b) account are deferred. This means you don't pay taxes on your contributions or the profits they earn until you make withdrawals after retiring.
- Lower Taxable Income: By contributing to a 403(b) plan, you reduce your total taxable income for that year, as contributions are made before any income taxes are deducted.
- Potential for Lower Taxes in Retirement: Since you defer paying taxes on your contributions and earnings until withdrawal, you may find yourself in a lower tax bracket when you retire, reducing the taxes owed.
- Tax-Free Withdrawals with a Roth Option: If your plan offers a Roth option, you pay taxes on your contributions upfront. However, both your contributions and earnings can grow tax-free, and withdrawals after age 59½ are also tax-free.
- High Contribution Limits: 403(b) plans typically have high contribution limits, allowing you to set aside a substantial amount for retirement. For 2024, the contribution limit is $23,000, with an additional catch-up contribution of up to $7,500 for those aged 50 or older.
- Employer Matching: Many employers match a percentage of employee contributions, boosting your savings even further. Some employers contribute as much as 50 cents to $1 for every dollar you contribute.
Tax Disadvantages
While 403(b) plans offer significant tax advantages, there are also a few potential tax-related disadvantages to consider:
- Taxes Upon Withdrawal: With a traditional 403(b) plan, you will owe ordinary income taxes on your withdrawals, and these withdrawals are taxed as regular income.
- Premature Withdrawal Penalty: Withdrawing funds before the age of 59½ may result in a 10% penalty, unless you meet certain conditions, such as becoming disabled.
- Limited Investment Options: 403(b) plans may offer a more limited range of investment options compared to other retirement plans, which could impact your ability to maximize tax efficiency.
- Taxable Upon Termination: If your employer terminates the 403(b) plan, you may lose the tax-deferred status of your contributions and be required to pay taxes on the distributed funds.
- Loan Restrictions: While some 403(b) plans allow loans, there may be restrictions, and financial advisors generally caution against borrowing from your retirement account, as it can reduce the power of compounding over time.
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Retirement income accounts
A 403(b) plan is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. It allows employees to contribute some of their salary to the plan, and employers can also contribute. A 403(b) plan is also known as a tax-sheltered annuity or TSA plan.
Assets in a 403(b) plan can be placed in various investment types, including annuity contracts provided through an insurance company, custodial accounts invested in mutual funds, or retirement income accounts set up for church employees.
A retirement income account is one of the investment types that can be used in a 403(b) plan. These accounts can be set up for church employees and can be invested in either annuities or mutual funds. Retirement income accounts are subject to the Employee Retirement Income Security Act (ERISA), which covers two main types of retirement plans: defined benefit plans and defined contribution plans.
Defined benefit plans promise a specified monthly benefit at retirement, which may be stated as an exact dollar amount or calculated using a formula that considers factors such as salary and service. The benefits in most defined benefit plans are protected by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC). On the other hand, defined contribution plans do not guarantee a specific benefit amount at retirement, and the employee or employer contributes to the employee's individual account under this plan. The employee will ultimately receive the balance in their account, which is based on contributions and investment gains or losses.
In conclusion, a retirement income account is one of the investment options available within a 403(b) plan, specifically for church employees. It offers flexibility in investing in annuities or mutual funds. The overall 403(b) plan provides tax advantages and the potential for compound interest, making it a valuable option for employees of public schools and eligible tax-exempt organizations to save for their retirement.
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Mutual fund investments
A 403(b) plan is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees can save for retirement by contributing to individual accounts, and employers can also contribute to employees' accounts. The only permissible investments in a 403(b) plan are mutual funds and annuities.
Mutual funds are a type of investment that pools money from many investors to purchase securities. These funds are managed by professional money managers, who allocate the pool of money across different investments, such as stocks, bonds, and other assets. Mutual funds offer several benefits, including diversification, professional management, and liquidity.
There are several types of mutual funds available within 403(b) plans:
- Growth funds: These funds aim for long-term capital appreciation and often invest in stocks from well-established companies. They typically provide higher returns over time but carry more risk.
- Income funds: These funds seek a high level of current income by investing in bonds and dividend-paying stocks, such as utility companies.
- Index funds: These funds passively invest in a specific stock or bond index and aim to match market performance. They are known for broad diversification and lower expenses compared to actively managed funds.
- International/global funds: These funds invest in securities traded outside of the United States or worldwide, including in the US.
- Precious metals funds: These funds invest in mining companies or securities linked to precious metals, such as gold.
- Target-date funds: These funds are grouped by target retirement dates and invest in a mix of stocks, bonds, and other assets appropriate for the investor's time horizon.
- Money market funds: These funds are considered relatively low risk and are a common investment option within 403(b) plans.
When investing in mutual funds through a 403(b) plan, it is important to carefully review the prospectus, which is a legal document describing the fund's characteristics. The prospectus outlines key information such as fees, past performance, and investment strategies, enabling investors to make informed decisions when selecting a mutual fund.
In summary, mutual fund investments within 403(b) plans offer a range of options for individuals to save for retirement. These funds provide access to different types of securities and asset classes, allowing for diversification and the potential for higher returns. However, it is essential to consider the associated risks, fees, and fund performance when making investment decisions.
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Frequently asked questions
A 403(b) plan is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. It allows employees to contribute some of their salary to the plan, and employers can also contribute.
403(b) plans cannot be funded with life insurance (issued after September 24, 2007), endowment, health, accident, or other types of insurance contracts. However, assets in a 403(b) plan can be placed in an annuity contract provided through an insurance company.
Investment options for a 403(b) plan include annuity contracts, custodial accounts invested in mutual funds, and retirement income accounts for church employees. The choice of investments is generally more limited compared to other plans, and individual stocks and real estate investment trusts (REITs) are prohibited.
Contributions to a 403(b) plan are made with pre-tax dollars, allowing tax savings now. Earnings grow tax-free until withdrawals are made, at which point they become taxable. If the plan offers a Roth option, contributions are taxed upfront, but withdrawals can be made tax-free.
