Retirement

Understanding your 403(b)

DATE | 11/08/21
3
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A 403(b) can be a great way to save for retirement. Learn more about what it is, how it works, and why it's important to save for your future.

What is a 403(b) plan?

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools and certain other 501(c)(3) tax-exempt organizations. It allows employees to contribute some of their salary to the plan, and the employer may also contribute to the plan for employees. As of 2018, 403(b) plans covered around one in five U.S. employees who have around a trillion dollars of savings.

How it works

A 403(b) can be a great way to save for retirement. It is similar to the private sector’s 401(k). A salary reduction agreement (SRA) must be completed to start payroll contributions into your 403(b) account.

Your district may offer an employer match. In other words, the district matches your contributions. For example, it could be fifty cents on the dollar up to a certain level, a flat amount, or many other types of options.

Whatever kind of match your district offers, if you’re not putting money into your 403(b) and there’s a match, then you may be leaving money on the table.

Contribution limits

The most an employee can contribute to a 403(b) account out of their salary in 2021 is $19,500. Those age 50 or over at the end of the calendar year can also make catch-up contributions of $6,500 beyond the basic limit on elective deferrals. If permitted by the 403(b) plan, an employee who has at least 15 years of service with the same eligible 403(b) employer may be able to contribute an additional $3,000. Learn more about contribution limits.

Roth option

Some districts offer a Roth 403(b) option. Roth contributions are after-tax, which means you pay taxes now on your contributions, but all qualified* withdrawals, including earnings, are tax free.

This is different from 403(b) contributions that are made on a before-tax basis. Before-tax contributions reduce your taxable income and defer taxes until you withdraw the money.

One of the greatest benefits of Roth savings is the ability to reduce your tax liability in retirement.

For decades, the assumption has been that most people would be in a lower tax bracket in retirement and thus would benefit from before-tax savings. However, changes in tax policy, including lower tax rates, the taxation of Social Security, and other deductions available under the tax code increase the chances that you could be in the same or higher tax bracket when you retire.

These changes mean that before-tax savings alone may not be the optimal tax strategy in every situation.

So the question is, do you want to pay the taxes on your contributions now or when you retire?

Exchanges, transfers, rollovers

You can move funds from another retirement plan into a WEA Tax Sheltered Annuity Trust 403(b) account, but the way these are handled is based on the type of retirement plan you have and your school district plan documents.

An exchange, if allowed by your school district plan, is when you move 403(b) funds from one district vendor to a second district approved vendor while employed by the same school district.

A transfer, if allowed by both your current and former school district plan, is when you move your 403(b) funds from a previous employer’s plan to your current employer’s plan.

A rollover is when you move funds from a different type of retirement account, such as an IRA, 401(k), or 457(b), to your current employer 403(b) plan. Check with us to see if rollovers are allowed into your employer’s plan.

It is also important to remember that a Roth 403(b) can only receive funds from another Roth 403(b) or Roth 401(k).

We can help you. Talk with a Member Benefits representative to discuss all the rules and procedures and to get your questions answered.

The importance of saving

As a Wisconsin public school employee, you have the Wisconsin Retirement System (WRS) and Social Security for retirement. But the two alone are not enough. On average, Social Security payments make up only about 14%–28% of retirement income for those who receive WRS. To build a secure retirement, you need three things: WRS, Social Security, and your personal savings, such as the 403(b).

Learn more about Member Benefits 403(b) program or enroll today.

1-800-279-4030
weabenefits.com/403b
weabenefits.com/enroll

*For qualified withdrawals from the Roth 403(b), the participant must be age 59½ or older and have had the account for at least five years.
Sources: IRS, Forbes