403(b) Basics
Most likely as a teacher, you are eligible to invest in a 403(b) retirement plan. (Sometimes referred to as a TSA.) Here are the main things you need to know.
What is it?
A 403(b) is very similar to a 401(k) which you may be more familiar. It is a retirement savings plan that you sign up for and contribute directly from your paycheck. A 401(k) is only for companies while a 403(b) is available for non-profits, hospitals, and school districts. This is why as a teacher, you can’t open up a 401(k) but instead are eligible for the 403(b).
Why might I want one?
As a retirement plan, 403(b)’s are tax advantaged. It is designed for you to pay less taxes than if you instead saved similar dollars into a non-retirement investment account.
Generally, you contribute dollars that are pre-tax and the money won’t be taxed until you withdraw the money in retirement. Theoretically, you can grow your money into a larger amount than otherwise because you pay less to the government over time.
Some school districts are now offering Roth 403(b)’s as an option. If you choose this, you will use after-tax dollars for contributions, but earnings will be tax free when you withdraw the money. This tax structure is great especially for younger teachers.
How do I open a 403(b)?
In the state of Iowa, there is one state regulated plan called Retirement Investors’ Club (RIC) plan. Companies must bid the state in order to be eligible to offer their investments for these plans. In theory, this forces lower fees. Generally, I think this is good for teachers because there are horror stories of teachers from other states being taken advantage of by being sold very expensive and inappropriate investment products within 403(b)’s. It is not a perfect system, and there are some drawbacks of doing it this way, but overall I think the state of Iowa is trying to protect employees.
Unlike a 401(k), you can’t go directly to your employer to open up this type of account. Instead you must go to one of the 4 core providers that have been approved. A representative from that company will help you fill out the appropriate paperwork to get the account opened and set up automatic contributions from your paycheck. They should also help you figure out appropriate investments to choose for your portfolio.
Additionally, there are a few optional providers besides the 4 core companies, but not all school districts allow them so you will have to ask if you want to use one of them. Fees and investment options are not negotiated with the state with these companies, so make sure you review those to make sure they are appropriate if you go this route.
Once the account is open you set up the amount you want to be contributed from your salary each paycheck, usually a percentage of your gross pay. This amount can be changed at a later date if you want to increase it over time or if you find you can’t afford the amount you originally chose.
How much can I contribute?
The IRS sets up contribution limits. You can contribute as much as you want as long as you stay under the annual limits. In 2020, you can contribute up to $19,500/year unless you are age 50, then you can contribute up to $26,000/year. These limits increase even more if you have been employed with your current employer for 15 years or more.
I hope this helps you understand the basics of a 403(b) plan. As always, if you have specific questions, feel free to email me at mike@teacherwealth.com.
