A 403(b) plan is a tax-sheltered retirement plan for employees of public schools, tax exempt organizations, and certain ministers. Contributions are taken from your pre-tax salary and have several different investment options. 403(b) plans are different from 401(k) plans so it is important that you understand the differences. Understanding your retirement accounts allows you to get the most out of your savings.
Tax Deductible Contributions and Tax-Free Growth
All contributions made to a traditional 403(b) plan are deductible on your federal income tax return. Since the contributions come from your pre-tax salary, the money goes into the account untaxed. This also cuts down your taxable income, which lowers your income tax liability. All of the money inside your 403(b) account grows tax-free until you start making withdrawals.
Employer Matching and Investment Options
Most employers will match your contributions at $0.50 to $1.00 for every dollar that you contribute to your 403(b). You also receive great investment options for your funds inside your 403(b). You can also get your minimum investment requirement fee waived to help employees invest in low expense institutional funds.
Contribution and Income Limits
In 2021, you can contribute up to $19,500 to your 403(b) account. If you are 50 years old or older, you are allowed a catch-up contribution of an additional $6,500. Some 403(b) plans have perks for people working at the same employer for a certain number of years, such as additional contributions. The combined contribution limit for 403(b) plans for both the employee and the employer was $58,000 in 2021, $64,500 including the catch-up contribution. The income limit set by the IRS for being able to contribute to a 403(b) plan is $290,000 for 2021.
If you are able to contribute to a 403(b) plan through your employer, you should take advantage of that opportunity. Having a diverse retirement portfolio helps build your retirement savings. If you need assistance in building a financial strategy for retirement savings, contact us here at FP Wealth Management. We are here to make a retirement saving strategy that works for you. Give us a call today to get started!