April 24, 2021
What Is a 403(B)? | 403(B) Explained
403(b), also known as Teacher’s 401(k) and Tax-sheltered Annuity, is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers, cooperative hospital service organizations, and self-employed ministers in the United States. Attorney and Advisor Chris Berry discusses 403(b) in this episode of Daily Wisdom.
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Episode Transcript
403(B)
Hey, this is Chris Berry. And today we’re going to talk about what is a 403(b). And if you like this information, please make sure to comment down below and subscribe to the YouTube channel.
Christopher Berry is a leading estate attorney and advisor in the area of retirement and legacy planning. He has been featured in publications, such as Ford’s, Kiplinger’s, Crain’s Detroit and more. He’s the host of the weekly radio show and podcast, the Chris Berry show. He’s a national thought leader, as it relates to retirement and legacy planning and as author of the Amazon best-selling book, The Caregiver’s Legal Guide.
So, my name is Chris Berry with Castle Wealth Group. And today, we’re going to talk about 403(b)’s. These are near and dear to my heart. Sometimes these are called teacher’s 401(k)s. You don’t have to be a teacher to have one of these, but typically you’re working for a nonprofit, you’re working for a hospital, you’re working for, a lot of times, a educational institution. My father worked for a community college for 47 years. He was a teacher there, taught psychology, a professor. He was a Dean there. He coached the basketball team. So, he had a 403(b) from his employer. I have a lot of clients that work for U of M, or MSU or one of the local colleges. They have 403(b)’s. I have a lot of clients that work at hospitals. They have 403(b)’s. And the name 403(b) is similar to 401(k), it’s referencing the tax code.
Annuity Options
And where do these investments get the tax deferred nature? And that’s something that they share with a 401(k)’s. Now with the 403(b)’s, a lot of times they have to choose a plan administrator, someone to administer the 403(b) plan. And there’s a lot of big ones out there. Some of them start with a T and they have a couple of A’s in the name and there’s other ones as well. And sometimes you might hear these 403(b)’s called tax-sheltered annuities as well. And there’s some different investment tools that are available inside of 403(b)’s, but typically understand that your choices are limited. Sometimes you might have the option of a fixed account that might pay 2% or maybe 3%. You might have some variable annuity options, and you can Google variable annuities and get an idea of what those are.
Maybe, I’ll do another daily wisdom piece on that. But, with 403(b)’s, understand that your choices are limited. And a lot of times, it’s limited to insurance-only products. Which may or may not, make sense in your situation. And also with some of the 403(b)’s, there’s limitations on what can do in terms of rolling the money out, depending on how you’ve saved. Especially, with some of these tax-sheltered annuities, you might not be able to take all the money out or do a rollover. You might only be able to take the money out over a period of time, say 10 years. So, I’m not saying a 403(b) is a good thing or a bad thing, just to understand it’s a type of tool. The big thing to understand is typically these are pre-tax accounts. Meaning when you take money out of these accounts in retirement, typically you’re going to be taxed on these accounts and tax at ordinary income tax rates.
Tax Sheltered
And so, that’s where a lot of clients look at rolling money out of these 403(b)’s to IRAs, so that now we can look at things like Roth conversions to get more tax efficient in retirement. So, if you do have a 403(b), understand that they’re a little bit more complex than typically a 401(k), which is at an employer or a IRA, which is an individual retirement account. A common thread or common theme between all of these is typically that they’re pre-tax, meaning that when you pull money out of there, you have to pay the tax.
So, hopefully this is helpful in understanding what a 403(b) is. Again, I call it a teacher’s 401(k). Again, you don’t have to be a teacher to have one, but we have a lot of clients who are teachers or work in hospitals, nurses that have these types of retirement accounts. And they’re very similar to the 401(k). Just a lot of times, a little bit more complex and some more restrictions than your typical 401(k). And a lot more restrictions than your typical IRA. So, hopefully this has been helpful, Chris Berry with Castle Wealth Group. If you have any questions, feel free to write those in the comments on the YouTube channel and make sure to subscribe. Thank you so much.
Castle Wealth Group, has clients across the nation and helps families plan, protect and preserve what is important by creating a retirement and legacy blueprint.