A 403(b) is a tax-deferred retirement savings plan available to certain public sector employees. While there's no way to accurately predict the future performance of investments, you can use historical returns to estimate how big your retirement nest egg in your 403(b) could become.
What is a 403(b) plan?
A 403(b) plan is a tax-deferred retirement plan available to certain employees of public schools, tax-exempt organizations, and religious organization. This type of account is also known as a tax-sheltered annuity, or TSA.
Tax-wise, these accounts work just like the more-familiar 401(k) retirement plan. Specifically, qualified contributions are not included in the participant's taxable income, and will not be taxable until the participant begins withdrawing money in retirement. Additionally, investment earnings in a 403(b), such as capital gains and dividends, are not taxed until they are withdrawn.
Many 403(b) plans offer a Roth contribution option, which has valuable, but different tax benefits. Roth contributions are not excluded from taxable income, but eventual withdrawals of Roth contributions and the gains that result from them will be tax-free if they are withdrawn as qualified distributions.
403(b) contribution limits
For the 2017 tax year, eligible employees can choose to have up to $18,000 of their salary deferred into their accounts, with an additional $6,000 catch-up contribution allowed for participants over age 50.
In addition, there are additional catch-up contributions that may be permitted for employees with at least 15 years of service. If the plan allows, these employees can qualify for an additional catch-up contribution of as much as $3,000 per year, up to certain lifetime maximums.
In addition, employers may (and often do) choose to contribute money on behalf of their employees, usually as part of a matching program. Including employer and employee contributions, total additions to any given 403(b) account can be no more than $54,000 in 2017, or $60,000 if the account owner is 50 or older.
How to estimate your 403(b)'s value at retirement
Your 403(b)'s value at retirement depends on two main variables -- how much you and your employer contribute to the plan, and how your investments perform.
Obviously, the amount you choose to contribute to your 403(b) plan is the variable that's within your control. If you contribute $10,000 per year to your plan for 20 years, you'll have deferred a total of $200,000 of your compensation.
On the other hand, there's no way to accurately predict your investment performance. Having said that, we can use historical trends to estimate what your account might be worth, especially if you're still a number of years away from retirement.
Over long periods of time, stock-based investments have averaged 9%-10% annual returns and bond investments have averaged 4%-5%. So, it's entirely reasonable to expect a properly allocated 403(b) plan to generate long-term annualized returns in the 7% ballpark. If your plan does better, great, but it's smart to keep your expectations reasonable.
Having said that, here's a calculator that can help you estimate how much your 403(b) could be worth by the time you retire, using your account's current value, time until retirement, and your and your employer's contribution rates. Note that "employer match" refers to the percentage of your contributions they're matching, and that "maximum employer match" refers to the maximum percentage of your salary that can be taken into account for the matching program.
Editor's note: The following language is provided by CalcXML, which built the calculator below.
* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
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