Benefits of contributing to a 403(b) account include:
Tax benefits.
Elective deferrals to a 403(b) plan are made on a pre-tax basis, which reduces your gross income in the year you make the contribution. For example, if you are in the 25% tax bracket and contribute $1,000 to a 403(b) plan, your taxable income is reduced by $1,000. This saves you $250 in federal income taxes (assuming no state income taxes).
Investing for retirement.
403(b) plans can help you save for retirement. However, the sooner you start saving, the more time your investment has to grow.
Employer matching contributions.
Many employers offer matching contributions to 403(b) retirement plans. Employer contributions are essentially free money that can help you reach your retirement savings goals faster.
Tax-deferred growth potential.
The earnings on your 403(b) plan contributions grow tax-deferred until you withdraw them at retirement. This can result in a larger account balance than if the earnings were taxed each year.
Loan features.
Some 403(b) plans allow you to borrow money from your account for certain expenses, such as buying a home or paying for education expenses. The loan must be repaid with interest over a period not exceeding five years (or longer if the loan is used to buy your primary residence).
Penalty-free withdrawals for certain expenses.
You may be able to withdraw money from your 403(b) account without paying the 10% early withdrawal penalty if you use the withdrawals to pay for qualified higher education expenses or certain medical insurance premiums after losing your job.
How do I make contributions to my 403b account?
Elective deferrals and employer contributions are two ways to contribute to your 403b account. Employees make elective deferrals, and the elective deferral limit for the 2022 tax year is $20,500. Employer contributions can be made in the form of matching contributions or profit-sharing contributions.
Contributions to a 403b account are not tax-deductible; however, they grow tax-deferred until withdrawal. Withdrawals from a 403b account are subject to federal income tax and, in some cases, state and local income taxes as well. Withdrawals before age 59 1/2 may also be subject to a 10% federal penalty tax. Please get in touch with your employer or plan administrator for more specific information on how to make contributions to your 403b account.
How should you invest your 403b contributions?
There are a few things to consider when deciding how to invest your 403b contributions. First, you’ll want to think about your goals. Are you saving for retirement? A child’s education? A down payment on a house? Once you know your goals, you can start to look at different investment options and decide which one is right for you.
There are many different ways to invest your money, so it’s essential to do some research and find the option that best suits your needs. You’ll also want to consider how much risk you’re comfortable with. Some investments are riskier than others, but they also have the potential for higher returns. If you’re unsure where to start, many resources are available to help you learn about investing and make the best decision for your future.
