The 403(b) was established in 1958 by the federal government to encourage employees in certain tax-exempt organizations to establish retirement savings plans. The name 403(b) refers to the relevant section in the Internal Revenue Code.

Why contribute to a 403b when my employer provides a pension?

Few pension plans provide an amount equal to salary. Studies have indicated that we will need about 80-90% of our pre-retirement income to maintain our lifestyles.  Your 403b will provide a healthy supplement to your pension and a huge inflation hedge.

My Favorite Advantages:

Ease of payroll deduction

It is painless and automatic.  You don’t have to think about it. Did you know that bear (down) markets may actually do wonders for retirement?  Look beyond the short term and invest appropriately for the long term.

Lowers your tax bill

403(b) plans are made on pretax basis, which can greatly reduce your tax bill. You can lower your federal and state taxes because your contributions are taken directly out of your paycheck before taxes are paid.  This has the potential to accumulate faster because you are not paying any taxes on the earnings in the account until you withdraw them (this advantage is called tax deferral). Contribute $150 to your plan per paycheck and you’ve reduced your tax bill by 33% (includes federal and state tax).  In effect, your $150 contribution costs you only $101 dollars. Please note that your contributions do not reduce your wages thus your social security benefits will remain in tact.

Use it as a planning tool. Have a big tax year or offset college cost.

Annually you can contribute (2016) $18,000 with a catch-up for those who turn 50 years anytime during the year of $6,000.    There is another catch-up provision for those who have at 15 years or more service for the same employer.   So, let’s say you inherited money you can offset or you have a kid going to college.  The plan offers flexibility.

Before committing to a 403b option what questions should you ask?

Will I be penalized for pulling my money out?  This is the most important question you can ask.  How available is my money?

Generally, penalty free distributions cannot occur until the participant reaches 59.5 years of age unless they have separated from service in the year they are turning 55.

For retirement before 55, you are eligible for substantially equal periodic payments.

You become disabled.

Hardship withdrawals are allowed if under severe financial distress. The participant must have no other resources available. A hardship withdrawal may be taken for un-reimbursed medical expenses, eviction or foreclosure on primary residence. Please note that for hardship withdrawal only contributions, not earnings, can be withdrawn.

So I have decided to payroll deduct into a 403(b). How do I set up my plan?

The regulatory requirements affecting retirement plans for tax exempt organizations have changed dramatically in the last year. From written plan documents to vendor and investment approval these changes have made many new demands for employers and employees alike.

Ask your employer for a list of the participating investment companies available to you. This is known as a vendor list. Select several investment companies from the list and then most importantly research these choices with an eye toward performance and cost. Next, determine the amount of $$$ you would like to contribute per paycheck. Finally, return the necessary paperwork to your employer and you are on your way.

What are my Investment Options?

Fixed annuities are contracts with insurance companies that guarantee that you will receive a rate of interest during your accumulation phase.

Variable annuities are contracts with insurance companies under which you make a series of payments into a tax deferred account. In return, the insurer agrees to make periodic payments to you at some future date.  Make sure the variable annuity is worth the money you are paying.

Mutual funds are pools of money invested in many different securities that are managed according to set objectives. For example, you can choose an aggressive fund for growth or a more stable fund for stability.

Other Considerations

Can you change the amount you contribute?


Can you stop contributing altogether?


Are there loans on my plans?

Possibly though not all vendors oblige.

What are my options for my 403(b) if I switch jobs?

Move money into your new employers 403(b), roll it into an IRA, or leave it where it is. Or, take a lump sum. Although this is not wise because it will trigger all kinds of penalties.

What happens to my 403(b) in the event of a divorce?

A distribution to an alternate payee will be permitted if pursuant to a qualified domestic relations order (QDRO). The spouse can roll the proceeds into an IRA or qualified plan.

What happens to my plan in the event of death?

Death benefits get paid under a 403(b) plan depending on when death occurs and who is named as the designated beneficiaries.

How will my 403(b) be taxed?

In most cases distributions are taxable as ordinary income.  Assets can not be left in the plan indefinitely, you must begin withdrawals no later than April 1 of the year following the year you turn 70.5 years of age.

Can you contribute to a 403(b) and 401K?

Yes, as long as your aggregate contributions may not exceed your elective deferral limit.

Can I contribute to a ROTH IRA?

Yes, ROTH 403(b) contributions are after-tax dollars that will grow tax deferred.  Withdrawals will not be taxed

Remember that planning for retirement is an on going process. The earlier you get started the better off you will be.  Your best friend when investing is time.

Conveniently located in Central New York state, Wolfson Financial Services is a financial planning and consulting firm dedicated to helping individuals, families and organizations reach their financial goals. If you have questions about this article or if you would like to become a client of Wolfson Financial Services, please call (315)449-4730.