Should You Open a 403(b) if Your Employer Offers One?

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  • A 403(b) is a tax-advantaged retirement savings plan.
  • These plans work similarly to 401(k)s and are a great tool for socking money away.
  • However, if you don't like your employer's plan, an IRA may be a better fit for you.

The quick answer? Probably.

Many people are familiar with 401(k) plans. After all, most large companies offer them. And even mid-size and small businesses offer the benefit of a 401(k) plan.

You may be less familiar with 403(b) plans. But actually, they're closely related to 401(k)s. And they offer many of the same perks.

What is a 403(b)?

A 403(b) plan is a retirement account offered by certain types of employers -- namely, nonprofits, schools, and other tax-exempt organizations. Like 401(k)s, 403(b) plans are funded through payroll deductions. You sign up to have a certain portion of your earnings allocated to retirement savings, and that money comes out of your paychecks during the year so you don't have to think about it.

Another similarity between 401(k)s and 403(b)s is that both allow you to save for retirement in a tax-advantaged fashion. Contributions go in tax-free, though there's a maximum limit you'll need to stick to that changes from year to year.

Also, just as you'll face penalties for taking a 401(k) plan withdrawal prior to age 59 1/2, so too will you face penalties for tapping a 403(b) before 59 1/2 (though there are some exceptions, such as becoming disabled).

Additionally, some companies that offer 403(b) plans also offer a Roth savings option, similar to how you might get that choice with a 401(k). If you save in a Roth 403(b), you won't get a tax break on your contributions, but you will enjoy tax-free withdrawals once you're retired.

Should you participate in a 403(b)?

Funding a 403(b) makes sense for a few reasons. First, as mentioned earlier, your contribution can serve as a tax break. Put $5,000 into a traditional 403(b), and that's $5,000 of income the IRS won't tax you on. Plus, investment gains in your 403(b) get to grow tax-deferred. That's different from investment gains in a regular brokerage account, which are taxable year after year.

Another reason to contribute to a 403(b)? Many of the companies that offer these plans also match worker contributions to some degree. You might, for instance, have an employer who will match 100% of your first $3,000 in contributions. So in that case, putting in $3,000 from your paychecks means getting an extra $3,000 for free.

Finally, it pays to fund a 403(b) because you'll need savings for retirement. And so you might as well enjoy tax breaks on the road to building them.

That said, one reason not to contribute to a 403(b) is if you don't like your employer's plan. Maybe it charges high fees. Or maybe it limits your investment choices. You may find that you have a lot more options for investing your money if you save for retirement in an IRA account. So that may be a better choice for you.

That said, if you're going to choose an IRA over a 403(b), at least contribute enough money to your employer's plan to snag your match in full. Otherwise, you're just giving up free money for retirement that could be really helpful down the line.

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