To 403(b) or not to 403(b)?

Teachers and non-profit professionals do remarkable work. They prefer to work for a cause rather than a paycheck. The hours are long, but the impact they have on others is significant. I still remember the influence my 4th-grade teacher had on my life.

My mom, grandmother, aunts, sister, and wife have all been teachers and my wife currently works for our church, a non-profit organization. I’ve been surrounded by educators and non-profit professionals my entire life.

A significant benefit for teachers is the defined benefit program. In Texas, teachers participate in the Texas Retirement System, or TRS. At retirement, they can enjoy a lifetime of guaranteed income. If you’re a teacher, you can access your benefit information at

However, a benefit often overlooked is the 403(b). The official title for a 403(b) is the tax-sheltered annuity plan, and it’s available to employees of public schools, non-profit organizations, and certain ministries. If you work for a 501(c)3 organization, then your employer qualifies for a 403(b) plan.

The tax-sheltered annuity name causes confusion because it includes “annuity” in the title. I’ve talked to several teachers about their retirement options, and most aren’t aware they can also invest in low-cost mutual funds. You can contribute to an annuity or a mutual fund.

I recently helped a friend convert his 403(b) from a high-cost annuity sold through a broker to a low-cost mutual fund at Vanguard. His previous annuity was charging him more than 2.5%.  We were able to lower his expenses by 94% because we moved his plan to a mutual fund with internal fees below .14%.

Insurance companies sell 403(b) annuities to teachers at benefit fairs, and you may have attended one in the past. The atmosphere is a financial carnival.  I would get calls from teachers telling me they need to open a new 403(b) annuity for the coming school year after attending one of these events. Most weren’t told they can contribute to their existing plan or invest in a low-cost mutual fund. As a result, some teachers now own four or five different retirement accounts, which is expensive and inefficient. How many 403(b) accounts do you need? One!

How can you improve your 403(b)? Here are a few suggestions.

You can contribute to your retirement plan through a salary reduction agreement with your employer. For example, if your salary is $75,000 per year and you contribute 10% of your pay to your plan, then your take-home pay will be reduced by $7,500. The $7,500 is now in your retirement account and hopefully growing. Your distributions will eventually be taxed as ordinary income.

You can also contribute to your retirement account through a Roth 403(b). A Roth allows you to add to your plan with after-tax money.  Your funds will grow tax-free, and when you start receiving distributions, they’ll be tax-free as well. Don’t confuse after-tax contributions with Roth contributions. After-tax is also known as voluntary, and they’re above and beyond your elective deferrals.

You’re allowed to contribute $19,000 to your 403(b). If you’re 50 or older, you can add another $6,000. The maximum allowable contribution (MAC) to your plan is $56,000. The amount is a combination of elective deferrals, non-elective contributions (from your employer), and after-tax contributions. If your income is less than $56,000, you’re allowed to contribute 100% of your compensation to your account.

Another bonus of the 403(b) plan is the 15-year rule. The rule allows an employee who has worked for their employer for 15 years or more to contribute an extra $3,000 for up to five years, or an additional $15,000.

After contributing to your 403(b) plan for years, when can you take the money out? The earliest you can withdraw your money without penalties is age 59 ½.  Distribution options can also apply to hardships like medical expenses or tuition payments, to name a couple.

Once you retire or leave your employer, you have the option to roll over your plan assets to an IRA or another employer’s retirement plan if it allows for incoming transfers.

How do you know if your 403(b) is doing well? If you’re not sure what you own, how much risk you’re taking, or the fees you’re paying, we can help. If you have multiple plans, you can consolidate them into one plan. If you have an expensive plan, we can help you locate a low-cost provider like Vanguard.

Those who are happiest are those who do the most for others.” ~ Booker T. Washington

October 21, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.


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