403b – What Should You Know

Your 403b is a tool that we talk about frequently on the site. Let's get into the details of what exactly your 403b is and how it can work for you

403b - The Basics

A 403b account is tax sheltered annuity account available to public school teachers and a few other careers in the public sector. It is tax sheltered, which means this money comes out of your check pre-taxes, which is a nice tool to lower your taxable income. At the time of writing this in 2022, the maximum contribution to your 403b is $20,500, which is a substantial amount. This means that you can invest up to $20,500 annually into this account. If you are able to max this amount out, that is very impressive! For most of us this isn't a realistic goal. Heck for some of our staff that would be over half their salary! 

So you can contribute $20,500 pre tax into this account, but what can you do with it? 403b is essentially the public sector version of a 401k. You really shouldn't touch it until you're at retirement age (59.5 years). There is a significant penalty if you do. So think of it as another investment tool at your disposal.  Something to one day supplement your pension. You can begin drawing money out of that account once you hit age 59 and a half. Ideally, you would wait until you hit 72 and are legally required to start withdrawing from it. That's another 12 years of growth in the market. Like we've mentioned before, there's potential for your investment to nearly double in that time period, even when you aren't investing in it!

How to set up your 403b

A 403b is an account that you must set up through your place of work. You'll have to go through your business office or HR department in order to set yours up. Because of this, it is also going to be restricted to what firms you can go through. In my current district, we recently made a push to have vanguard available as our provider. We like them due to their transparent fee structure. Once you get yours setup, you'll have to consider how much you are comfortable with contributing each check. Once you've set that up with your HR department, login to your investment firm and allocate what series of index funds you'd like you money to go into. Then you are all set for years of passive investing and growth. 

Pro's

Some pro's of using your 403b for investing.

1. It's tax-sheltered. That means you're not going to pay taxes on that income until you start withdrawing from that investment account. That can be nice to lower your current taxable income. 

2. There might be some matching money. Many school districts have some kind of incentive program for investing into your 403b. For schools in our area, it comes in the form of the district matching up to a certain percent or dollar amount. Districts like doing this because they also have to pay less tax on your income so contributing $1,000 to your 403b is cheaper for them than increasing your salary $1,000. Please, if your district has a matching program take advantage of it. It's free money you are missing out on!

3. It's passive. You really don't have to do anything once you get things set up. You can always modify and change what or how much you invest but typically its very hands off. 

Con's

1. You can't touch it early. Let me rephrase that. You shouldn't touch it early. Pulling money out of your 403b before age 59.5 comes with a penalty. You'll have to pay 10% penalty on the money, and you'll have to claim it as income on your taxes. Honestly, I think of this as a positive because it forces me to not touch that money until I am much older. 

2. Limited investment options. You are definitely limited to what companies you can invest with. When I started my job, we had to go through a local financial group. They were fine, but their fees were astronomical compared to what I currently have with Vanguard. There is potential to work around this. Typically your district will be open to adding Vanguard or others to your investment groups.

So all in all, Your 403b should be a tool in your investment tool box if you qualify for it. When you retire you will thank your younger self for putting away what money you were able to. If you want a deeper dive into all thing's 403b check out Dan's website at - 403bwise.org. It is a fantastic resource for 403b info. 

Keep Stacking!