It's Teacher's Appreciation Week - take some time this week to show gratitude towards the educators in your life through a small gesture of kindness or appreciation to acknowledge their hard work.
Teachers are some of the most valuable members of our society. They play a critical role in shaping the future by educating and inspiring the next generation of leaders, thinkers, and innovators. Being a teacher takes a high level of kindness, compassion, patience, and dedication.
In light of Teacher's Appreciation Week, we thought it would be a good time to discuss 403(b)s. What is a 403(b) and what are the benefits of investing in one?
What is a 403(b)?
A 403(b) plan (tax-sheltered annuity plan or TSA) is a retirement plan offered by public schools and certain charities. It's similar to a 401(k) plan maintained by a for-profit entity. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts.
What are the tax benefits?
If your plan permits, employee elective deferrals to a 403(b) plan can be made on a pre-tax (salary-reduction) or after-tax (Roth) basis. The contribution is taken directly from the employee's salary and invested in the 403(b) plan before any taxes are withheld. This means that the amount each employee defers to the plan is not included in his or her gross income. The employee pays less current income tax because his or her taxable income is lower than it would otherwise be. The annual limit for pre-tax contributions is $22,500 in 2023 (up from $20,500 in 2022).
If your plan permits, your employees can elect to designate all or part of their elective deferrals as Roth 403(b) contributions. Your employees' Roth contributions are made on an after-tax basis. Roth 403(b) contributions don't provide any up-front tax benefit, but they're always tax-free when distributed from the plan. Earnings on Roth contributions are also tax-free if paid to the employee in a qualified distribution.
- Taxes deferred on employer contributions
- Tax-deferred growth
- Employees age 50 or older can contribute more than the annual deferral limit
- Long-service employees can contribute more than the annual deferral limit
- Tax-free rollovers are allowed
- Participants may qualify for the tax saver's credits
To read the full article on 403(b)'s tax benefits, advantages, and disadvantages, visit our Business Retirement Plan Resources page and select the article "403(b) Plans".
If you're an educator and have questions about investing in a 403(b) or what to do with your 403(b) after retirement, schedule a call today.