Setting Up a 403(b) Account
If you don’t already know, a 403(b) is a type of tax-advantaged retirement plan that’s available to certain employees of public schools, non-profit organizations, and churches.
It’s similar to a 401(k) plan (offered by for-profit employers), and can be a great way to start investing for retirement. In this guide, we’ll help you figure out how to set one up. And if you aren’t sure if you’re ready to start investing, we can help you there too. So let’s get to it!
What we cover in this guide
Why set up a 403(b)
Types of 403(b) plans
Getting started
Deciding on your contribution amount
Selecting your investments
Sticking with it
Why set up a 403(b) account?
A 403(b) can be a great way to start investing for two important reasons;
1) It offers a tax-advantage. You can contribute pre-tax money and then let that money grow tax free. You’ll only pay taxes when you take it out in retirement. The ability to defer taxes like this can add up to big savings over time.
2) Some employers offer a match, meaning they’ll contribute money in addition to what you contribute. However, not all employers offer a match, so be sure to check with yours.
Both of these reasons can make a 403(b) an attractive place to invest your money. But we should note, not all 403(b) plans are created equal. So we should get into a few more details.
Types of 403(b) plans
It used to be that all 403(b) plans were invested in financial products called annuities. Over time, however, more plans have started offering the ability to invest in mutual funds, similar to what many 401(k) plans offer. And this can make a big difference in how your retirement savings grow.
We aren’t going to get into the details here, but big picture, annuities are somewhat complicated financial instruments that can be difficult for the average investor to understand. And they often charge high fees to boot. Some are also designed to reduce taxes, which means they aren’t ideal for a tax-advantaged account, like a 403(b). They aren’t necessarily “bad” but they may not be the best option if you’re young and trying to maximize your retirement savings. So if your 403(b) is an annuity account, you may want to think twice and consider setting up an IRA instead.
And yes, some mutual funds also charge high fees, but they’re generally easier to understand. And they also tend to be better suited for building wealth over time. So if your employer offers a 403(b) plan with low-cost, diversified, mutual funds, it can be a great way to save for retirement.
Here’s what you do.
1) Get started by signing up
You should be given information on how to sign up for your 403(b) when you first start at your new job. You can also talk to someone in human resources if you need help.
Typically, someone will hand you a packet of information or direct you to an online portal where you can access your various workplace benefits. This would include your 403(b) if your employer offers one.
Some employers have a waiting period before new hires are able to enroll. If that’s the case, mark your calendar and sign up as soon as you become eligible. The sooner you start contributing to your 403(b), the more time your money will have to grow.
2) Deciding on your contribution amount
Deciding what portion of your paycheck to contribute to your 403(b) can be a little tricky. After all, you do need to balance living today with saving for the future. It’s important to understand that money you contribute to a 403(b) will generally be tied up until retirement. There are a few exceptions, but for the most part, you can’t start taking your money out until you turn 59 and a half without incurring penalties (yes it’s a strange number, but it’s how the law was set up). So for the most part, you should truly consider your contributions “retirement” money.
So how much should you contribute? Well, ultimately, that’s up to you.
If your employer does offers a match, it often makes sense to at least contribute enough to get the full match. The match is essentially free money, at least once it has vested – the vesting schedule tells you what percentage of the matched money you would keep if you left your employer. The exact matching and vesting formulas can very from one employer to another. So be sure to check to see how yours work.
Even if your employer doesn’t offer a match, it can still be a good idea to contribute to your 403(b) because of the tax advantage we mentioned. By deferring taxes until retirement, your money should be free to grow faster than it would otherwise.
If you aren’t sure how much money you can afford to contribute into your 403(b) you can always start small and build up over time. You even might be surprised at how much you can save.
3) Selecting your investments
Like a 401(k), your 403(b) is not an investment itself, it’s just an account for holding investments. For 403(b) plans that hold mutual funds, they typically offer a range of different funds to choose from. When you invest in funds, your money will be spread out across dozens or even hundreds of investments, reducing your risk. These investments will range from stocks, to bonds, to cash.
Pay attention to fees
As you compare your investment choices, pay attention to the management fees (also called the expense ratio), which can vary from fund to fund and from one 403(b) plan to another.
Some 403(b) plans negotiate lower fees than you would get if you invested on your own in an IRA or taxable brokerage account, but some don’t. If you’re paying more than 1% in annual management fees, you’re probably better off sticking with lower-cost index funds.
Think about your risk tolerance
You’ll also want to consider your balance between riskier investments (stock funds) and more conservative investments (bond funds). Generally speaking, the younger you are, the more risk you can take, and as you get older, the less you’ll want to take.
Your employer might also offer a default investment selection with something called a target date fund, which will automatically select and manage investments for you based on your age, reducing the risk as you approach retirement. This can be a good choice for low hassle investing, but again, you’ll need to keep an eye on the fees. Sometimes these funds charge higher fees making them less attractive choices.
Learn More: If you want to learn more about investing, like how to create a portfolio, we get into more details in our core content, starting with the basics basics.
4) Sticking with it
A great thing about having a 403(b) is that you’ll be making automatic contributions to your retirement savings without having to lift a finger. You may even be able to set up automatic increases for your account, so your contribution percentage will increase over time. Any time you get a raise can be a great opportunity to increase your contributions.
And your 403(b) isn’t the end of the story when it comes to investing.
You could also consider setting up an IRA outside of work, which also offers a tax benefit (but won’t have a match), or setting up a taxable investment account with a brokerage or robo-advisor. These won’t offer any tax benefits, but they offer more flexibility – you can take your money out anytime and don’t have to wait until retirement. With a 403(b), your money is tied up until retirement for the most part.
It doesn’t necessarily need to be all or nothing either – you could invest in your 403(b) to get the full match, contribute some money to an IRA, and put some in a brokerage account or robo-advisor for nearer-term needs. But no matter which type of accounts you choose, you’ll want to periodically review your investments to make sure you’re still on the right track and your investment choices are appropriate for your situation.
Summary
Setting up your 403(b) can be a great way to start investing because your contributions are automated, it offers a tax benefit, and your employer may even match a portion of your contributions. The sooner you sign up and get started, the faster your investments will grow. And the more confident you can feel about retiring comfortably when the time comes.
You can learn more about 403(b) accounts on the IRS website here.
Anything else we can help you with?
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Investing in a brokerage account or robo-advisor
