Either way, you need your own retirement plan.

And what if I tell you that you can use a little-known retirement savings loophole? I’m telling you about one of the best retirement investments around: the 403(b) plan (for you nerds, this is as fun and easy as it gets).

Interested? Keep reading!

What’s a 403(b) Anyway?

A 403(b) plan is a retirement savings scheme that’s often offered by employers. These include:

• Schools
• Hospitals
• Non-profits
• Religious organizations
• Universities
• Charities

So teachers, nurses, clergy, nonprofit staff or workers in other occupations with defined-contribution pension plans might have access to a 403(b) plan. A 403(b) plan is much like a 401(k) plan. You contribute from each paycheck to the plan, which gets invested.

The best part is that the money comes out pretax, meaning you decrease your current tax bill, and your investment gains grow tax free until retirement. Who said tax was evil?

Should I Join the 403(b)?

Chances are, you can create one if your employer is one of those listed. Ask your employer first, though: some of them have qualifying jobs.

If, however, you’re given the go-ahead to join, start contributing as soon as you can afford to. Your greatest asset when you’re saving for retirement is time. Let that money go to work for you for as long as possible.

Regularity counts too – tiny monthly contributions can really snowball over decades. Auto-escalation will ramp up your rate in small, painless steps.

How Do Contributions Actually Work?

You can decide in your company’s 403(b) plan what percentage of your pay you want to contribute: typical starting points are 5% or 10% of salary.

For instance, if your annual pay is $50,000 and you put away 10% pre-tax in your 403(b), you’ll put in $5,000 a year.

The IRS sets a maximum you can stash in your 403(b) every year:

• $22,500 in 2023 if under age 50
• $30,000 in 2023 if over 50 (extra “catch-up” contributions)

And a bonus: most employers will match some of your contributions! Don’t allow that free retirement money to go right past you.

How Can I Grow My 403(b) Money?

When you start contributing, it’s time to pick investments. What’s available depends on your employer’s plan. Common choices include mutual funds, such as:

• Stock funds
• Bond funds
• Balanced funds with both stocks and bonds
• Money market or stable value funds
• Target date funds

Target date funds automatically adjust their risk level to conform more to the target retirement year. Set it and forget it!

Look at all expenses and fees for any investment options. If fees and such are low, go for low-cost index funds.

Why Are 403(b) Plans So Awesome?

Here’s why:

• Tax savings now – Contributions come out pre-tax, reducing your current income taxes.
• Tax deferred growth – Investment earnings grow tax free over decades.
• High contribution limits – You can save more in a 403(b) than an IRA.
• Employer match – Free extra retirement money from employer contributions.
• Portability – You can roll it over when changing employers.
• Protection – Your money enjoys protection from bankruptcy and creditors.
• Retirement income – Provides funds for your life after your career.
• Roth option – Some plans allow Roth contributions for tax-free withdrawals later.
• Loans – You may be able to borrow against your balance if needed.

When Can I Withdraw The Cash?

Because 403(b) money is intended to be saved for retirement, there are restrictions as to when you can spend it:

• Age 59 1/2 – Penalty-free withdrawals start here.
• Separation of service after age 55 – May allow distributions if plan permits.
• Loans – Can borrow against balance while employed. Repaid with interest.
• Hardship – Financial emergencies may qualify for penalty-free withdrawal.

Leaving it in the account until after 59 1/2 will help reduce income taxes, and because taking it out before then incurs a 10% penalty on top of the income taxes, leave it alone until retirement any way you can, if at all possible.

What If I Leave My Job?

If you change jobs and your employer no longer has a 403(b) you can do several things:

• Cash out – But taxes and penalties apply if under 59 1/2. Not ideal.
• Roll over to an IRA – Keeps your savings growing tax deferred.
• Roll over to new employer’s plan – If plan allows incoming rollovers.
• Leave it – Can keep assets in old plan if account is large enough.

As for whether to take the money, rain or shine: no matter what, do not cash it out and keep it in your pocket before you retire. Too many taxes and penalties will keep it from ever being yours.

How Much Should I Be Saving?

Great question! Some general guidelines on 403(b) savings targets:

• Shoot for 10x your ending salary. So $500k savings if ending income is $50k.
• Max out annual contributions if possible – that’s currently $22.5k plus catch-up.
• Increase contribution rate steadily over time. Even 1% more annually = huge difference.
• Start early! Time for compound growth is key.
• Consistent contributions build sizable savings over decades.
• Meeting with a financial advisor can help create a tailored strategy.

Even modest starting contributions today can compound significantly over 30+ years.

Takeaway

Here are some tips to take your 403(b) savings to the next level:

• Enroll and start contributing as soon as eligible. Consistency matters!
• Take full advantage of any employer matching funds.
• Increase your contribution rate little by little each year.
• Choose low-cost investments like index funds.
• Rebalance your asset allocation periodically.
• Learn about beneficiary choices and distribution options.
• Meet with an agent from Teachers Retirement Solutions Today!