Teachers and 403Bs

By October 3, 2016 Blog No Comments
A teacher helping one of her students in class.

For teachers, retirement setups provide one of the key perks of their job. Knowing how to properly plan for a retirement from a teaching position is of utmost importance to teachers looking to have a relaxing and successful post-work life. The first step of doing so is picking a stellar retirement plan.

Picking a retirement plan can be overwhelming. Thankfully, however, one retirement plan for teachers exist that holds a clear advantage over others: 403b. With this excellent retirement plan, teachers can rest easy in the knowledge that their retirement will be the dream they’ve been eagerly awaiting.

What are 403b’s?

Another title for the 403b retirement plan is “tax-sheltered annuity plan.” This retirement plan allows certain public school employees (teachers included), to keep some of their retirement funds protected from tax under Code Section 501c.

Why Should Teachers in California contribute to them?

In California, taxes make the prospect of retirement somewhat uneasy at times. Teachers may worry that a sudden unknown tax disadvantage may present itself at the time it comes to gain the benefits of their 403b account. However, with the 403b account teachers gain a lot of individualized power over their retirement age future. Because the 403b is both an individual retirement account (IRA) and a defined contribution plan, very few surprises should spring themselves on teachers contributing to them over their careers. Once you’ve read further into this article, you will learn even more information that will show you why this awesome retirement plan is so beneficial to those teachers residing in California.

What are their benefits?

Three primary benefits exist that make the 403b plan right for teachers:

1.) All contributions to 403b plans are tax deductible, as pre-tax dollars can consistently be deposited into the 403b account. Do to this, the net effect becomes a reduction of annual taxable income equal to the amount the teacher in question placed into the 403b.

2.) For teachers who are active in investing their money, a 403b plan provides many excellent opportunities. At any time while your money is held within a 403b account, you can grow said sum legally through intelligently placed, targeted investments. For the entire duration the growth from investments sits in these accounts, the growth will not gain any tax interests.

Only once you bring said funds out of the account, will they begin to gain interests. Once the funds are withdrawn, the growth will simply be taxed according to your current income tax rate, which will almost certainly be lower than taxes applied to most investment growth. If you wait until you are actively retired to withdraw this money, you will almost certainly pay a much lower tax rate on the fruits of your investments inside of the 403b account.

3.) Depending on certain qualities of your finances, potential disabilities, living situation, and more, you may be eligible for certain tax credits in your 403b account. These tax credits are based on deferred income that has been previously placed inside of your 403b.

What is the difference between a 403b and a 457?

Another popular choice for teacher retirement plans is the 457b account. While this account has some nice advantages, the 403b matches many of these advantages, while providing even more perks for their account owners. Both plans provide an in-service withdrawal at age 70.5, although the 403b actually beats out the 457 in this case, and allows access at the age of 59.5.

Two major advantages exist only in a 403b account: in-service disability withdrawal, and in-service hardship withdrawal. Perhaps the only disadvantage presented between the two is the potential for an early withdrawal penalty when dealing with a 403b account. Thankfully, a teacher will almost never be in the position to need an early retirement withdrawal, and this disadvantage is a minor setback when compared to all the other advantages 403b accounts have over 457b accounts.

What are you waiting for?

While the amount of money you put into a 403b account may seem like less at times, with the added potential of tax-reduced investments and a steady flow of assets into the account, the 403b option is much safer and beneficial to the economic group teachers belong to. After all, a little bit can make a big difference over time, and the logical minds of teachers should be able to recognize this phenomenon.

If you are ready to begin your path toward a relaxed, fulfilling retirement full of family and friends, consider contacting your financial and legal assistants about a 403b account today. Years from now when you’re sitting on the beaches of Hawaii sipping Pina Coladas without a care in the world, you will thank us for suggesting the awesome power a 403b account has to offer you.

About Woven Capital

Aaron Hatch is a Certified Financial Planner and co-founder of Woven Capital, a fee-only financial planning and investment management firm that specializes in helping people balance life, work, and community. Aaron has been quoted in various publications, including The Chicago Tribune, US News and World Report, and the Huffington Post among others. Aaron can be reached at aaron@wovencapital.net

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