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What Exactly Is a 403(b) Plan?

Many people have heard of a 401(k) plan [1], but have you heard of a 403(b)? While less common than the 401(k) — due to stipulations we’ll get into — it’s a very helpful investment tool that’s only available to people in specific jobs. According to the IRS [2], certain people employed by public schools, select tax-exempt organizations and some ministers can have this tax-sheltered annuity, or TSA. Sound a little confusing? Let’s break it down.

Can I get a 403(b) Plan?

If you don’t fall into one of the groups mentioned above, then you’re not eligible to have a 403(b) plan. However, even if you do work at a public school or are a minister, there are still more a few more qualifications you must have before you can sign up.

For example, ministers in a 501(c)(3) organization are eligible, as are self-employed ministers, or someone who falls into both of these categories.

Double check with your employer or tax professional to see if you qualify for their plan.

How Does a 403(b) Plan Work?

A 403(b) plan is actually a tax-sheltered annuity; you may also hear it called a defined contribution retirement plan. This means you have a few options for how you’d like your 503(b) to function. The first is an annuity contract which you will get through an insurance company. The second is a custodial account, which invests your money into mutual funds. The third is for employees of a church, and this retirement account offers either annuities or mutual funds. If these all sound like foreign words to you, that’s ok. You can simply drop by your bank or call a financial advisor [3]to get the rundown on how these work and which would be best for your retirement goals.

Is a 403(b) Better Than a 401(k)?

Whether a 403(b) is better than a 401(k) depends on what your savings goals are. This is something you should explore with a financial professional to ensure that you’re making the best choice. You also have the option to get both retirement plans if they are available to you.

The other reason you should favor one plan over the other is if there’s an employer match. For example, if an employer will contribute to a 401(k) plan but not a 403(b) plan, then taking advantage of the free money might make that the better option for you. However, employers can also contribute to your 403(b) plans as well. Keep in mind, this may change if you’re a self-employed minister, for example, since you are your own boss.

There are also Roth 403(b) plans available in some cases. Those mean you won’t pay taxes when you make withdrawals in retirement, unlike with a traditional 403(b). This is generally the same as how 401(k)s work, so it doesn’t necessarily make one better than the other without digging a little deeper into what each offers.