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What is a 403(b)? Understanding your public sector retirement plan

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You've devoted your career to the service of others. Whether you're a teacher, librarian, minister, government employee, medical practitioner or other public sector professional—your benefits may include a 403(b) retirement plan.

These days, 401(k)s tend to dominate the retirement savings conversation. So if a 403(b) is the retirement plan offered by your employer, you may have questions. We've got you covered. It's important to break down the plans' key features, options and differences.

What is a 403(b), and how does it work?

A 403(b) is an employer-sponsored retirement savings plan for public sector employees. Your employer may offer a 403(b) if you're employed full-time by a public school, government entity, church or other 503(c)(3) organization. As with a 401(k), a 403(b) helps you save for retirement through payroll deductions while enjoying tax benefits. You decide how much to deduct from each paycheck as a percentage of your income or a set amount.

Your money is then sent to a personal retirement account that houses your investments. 403(b) investment options typically include annuities or mutual funds:

  • An annuity is an agreement between you and an insurance company. You make periodic payments (known as premiums), and the insurance company promises recurring payments to you later on.
  • mutual fund is an investment vehicle where your money is pooled with other investors to mutually buy a collection of stocks, bonds and other securities.

As with any investment, earnings are not guaranteed. There's always a risk of loss in the market. But investing long-term may give your money the best chance to grow.

How to choose between a traditional and Roth 403(b)

When deciding between a traditional or Roth 403(b), the main consideration is taxes. Do you think you'll be in a higher tax bracket during retirement than you are today? Or do you expect to be in a lower tax bracket after leaving the workforce?

  • With a traditional 403(b), you contribute pretax dollars. This means the money comes straight out of your paycheck before you've paid any taxes on it. Deducting pretax dollars lowers your gross income, reducing your total tax liability for the current tax year. However, you'll have to pay taxes on any withdrawals you make during retirement. This option could be a good choice if you expect to be in a lower tax bracket in retirement.
  • In a Roth 403(b), you contribute after-tax dollars. This means you've already paid tax on the money. Accordingly, you won't get any break on your current taxes. However, this option does allow you to take a distribution once you reach age 59½. If it has also been at least five years since your first contribution, the earnings in your account will be withdrawn tax free. Once you are 59½ you can withdraw this money without the 5 year requirement. This could be a good choice if you expect to be in a higher tax bracket in retirement.

You can make penalty-free withdrawals from your 403(b) plan starting at age 59½. Early withdrawals face a 10% tax penalty. And by age 72, you're required to take a required minimum distribution (RMD). That's an amount you must withdraw from your account each year, however they can be delayed if you are still working.

403(b) contribution limits

The IRS sets an annual contribution limit for your 403(b). In 2022, that limit is $20,500.

In addition to your contribution, some employers offer a match, where the employer contributes to your 403(b). The amount can vary, but it's usually based on a portion of what you give, up to a maximum amount. This is basically free money, so you should take advantage by contributing enough to get the full match. Keep in mind the combined employee-employer contributions can't exceed $61,000 or 100% of your annual salary (whichever is less).

If you're 50 or older, you can contribute an extra $6,500 each year as a catch-up contribution. This is a great way to make progress toward your savings goals if you're feeling behind. Catch-up contributions also are available to employees who've been with the same employer for 15 years according to the plan document, even if they haven't reached age 50. These employees can contribute an extra $3,000 annually, up to a maximum of $15,000.

Not sure where you currently stand with your goals? Use a retirement income planning calculator to gauge your progress and see if any adjustments need to be made to your plan.

What is the difference between a 401(k) and 403(b)?

While 403(b) and 401(k) plans are similar, they do have notable differences.

  • Access: The largest difference is who has access. A 401(k) is offered to private sector employees, while a 403(b) is for public sector employees.
  • Investment options: 403(b) plans usually include annuities and mutual funds. 401(k) plans have more variety, allowing participants to invest in individual stocks, bonds and exchange-traded funds.
  • Contribution limits: You may be able to contribute more to a 403(b) than to a 401(k), mainly if you've been with the same employer for 15 years. The additional $3,000 per year you can contribute is only available for 403(b) plans.

In more uncommon circumstances, your employer could offer both a 401(k) and a 403(b). If this is the case, you may be able to contribute to both. Just remember that you face the same contribution limits. In 2022, your aggregate contributions can't exceed $20,500.

What happens to an old retirement plan if you change jobs?

If you find yourself in the middle of a job change, you can handle your previous plan—whether it's a 403(b) or a 401(k)—in a few ways.

Roll it over

To maximize the potential of your retirement savings, you can roll over your previous plan to a new one. The best way to do this is through a direct rollover, where a check is sent from your old retirement plan to your new account, so you don't owe taxes.

When rolling over a retirement plan from a previous employer, you have two options:

  • Roll over your old plan to an individual retirement account (IRA). You can move a previous 403(b) plan to an IRA. IRAs tend to have more investment options and can have lower fees, making them more attractive.
  • Roll over your old plan to your new employer. Are you moving an old 401(k) to a 403(b)? Or perhaps consolidating an old 403(b) to a new 403(b)? Keeping your savings in one place can simplify your retirement goals and make it easier to track your progress.

Leave your retirement plan with your former employer

Retirement plans with a balance of at least $5,000 can stay with your former employer. But you lose a couple of key benefits. You no longer can contribute to the plan, limiting its growth potential. You also don't have any say in your employer's investment selections.

Cash it out

Though significant penalties often make this option a last resort, you may have the option to cash out your old plan. Remember that withdrawals made before age 59½ are subject to taxes and an early withdrawal penalty, so make sure you are aware of your costs, including both taxes and penalties before making this decision. You might be able to avoid penalties if you're over age 55 or by reinvesting the money in a different retirement account after leaving the job.2

Getting the most from your 403(b)

A 403(b) plan can be a nice employer benefit—and double as a core component of your investment strategy. The tax-friendly payroll deductions can support your retirement goals. But it's crucial to research your options to determine what's best for you.

Are you on track with your retirement goals? Connect with a Thrivent financial advisor to learn more about your 403(b) plan, check in on your progress and explore other retirement savings resources.

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1Thrivent and its financial advisors and professionals do not provide legal, accounting or tax advice. Consult your attorney or tax professional.

2There may be benefits to leaving your account in your employer plan if allowed: You will continue to benefit from tax deferral; there may be investment options unique to your plan; fees and expenses may be lower; plan assets have unlimited protection from creditors under federal law; there is a possibility for loans; and distributions are penalty-free if you terminate service at age 55+. Consult your tax professional prior to requesting a rollover from your employer plan.

Investing involves risk, including the possible loss of principal. The prospectus and summary prospectuses of the variable annuity contract and underlying investment options contain information on investment objectives, risks, charges and expenses, which investors should read carefully and consider before investing. Available at