Advantages, Details, and Disadvantages of 403b Plans

Advantages, Details, and Disadvantages of 403b Plans

403b plans are retirement savings plans that allow you to make annual dollar contributions (just like 401k plans) and let them grow tax-deferred up until you withdraw them (upon retirement). Note the fact that 403b plans allow for pre-tax contributions (that is from your Gross Wage). Go here to read about the distinctions between pre-tax and after-tax 401k contributions. 403b plans are also known as tax-deferred annuities.

403b Plans are engineered for employees of tax-exempt organizations such as:
- Churches
- High schools, colleges & universities
- Museums
- Hospitals
- Other social & public welfare charities

Since your contributions towards a 403b plan come out of your GROSS WAGE, this means you will be lowering your current taxable income by the amount of the contribution. This means you will be paying lower taxes NOW!

Advantages of 403b Plans

- As mentioned above, your lower your current taxable income by contributing towards a 403b plan. This also allows your contributions to grow tax-deferred up until withdrawal. All the years of compounding interest will surely add up!
- When you retire, chances are higher that you will be in a lower tax bracket (because you will have quit your job). Therefore, apart from lowering your current taxable income, you also lower the taxes you will pay upon retirement (and maturity of your 403b plan).
- The 403b contributions are automatically deducted from your paycheck, therefore you have no worries about the administration of your contributions.
- 403b plans allow you to choose where your money is invested in. Go here to read more about 401k and 403b investment options.

403b Plan Contributions
The maximum pre-tax 403b contributions that you are allowed to make is $15000 in 2006.

Year Max 403b Contributions
2004 $13000
2005 $14000
2006 $15000

This maximum amount will increase by $500 every year after the year 2006.

403b Catch Up Contributions

For 403b contributors over the age of 50, additional “catch up” contributions of $5000 in the year 2006 are available. After the year 2006, this amount can be increased by $500 a year. Therefore:

Year 403b Catch Up Contributions

2005 $4000
2006 $5000
2007 $5500
2008 $6000
2009 $6500

Furthermore, certain special employees who have served in any type of organization (listed above) for more than 15 years or more are allowed to make an extra pre-tax contribution of $3000 per year towards their 403b plans.

Where the 403(b) Can Be Invested

403(b) money can be invested in a fixed annuity; and/or variable annuity; and/or a mutual fund.

Fixed Annuities

Fixed annuities operate much like certificates of deposit but are not insured by the Federal Deposit Insurance Company (FDIC). Generally, investors are given two interest rates: the current rate and the guaranteed rate. The current rate is the return that the insurance company promises to pay for a set period of time, typically between one and five years. The guaranteed rate, usually lower, is the minimum rate that investors will receive after the current rate expires, regardless of market conditions.

Variable Annuities

A variable annuity offers a range of investment options — typically mutual funds that invest in stocks, bonds, short-term money-market instruments, or some combination of the three. These investments options are referred to as the subaccount. The value of the investment will vary depending on the performance of the investments in the subaccount. There is usually a death benefit that will pay a beneficiary the greater of the account value or a guaranteed minimum amount, such as total purchase payments. Variable annuities are securities regulated by the Securities and Exchange Commission (SEC).

Mutual Funds


A mutual fund is an investment that pools money from many participants and invests in stocks, bonds, short-term money-market instruments, or some combination of the three. The combined holdings of stocks, bonds, or other assets that the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. There are two kinds of mutual funds: loaded mutual funds and no-load mutual funds. A load is a commission the investor must pay in order to purchase/sell that fund. All mutual funds have operating costs. Mutual funds are securities regulated by the SEC but are not guaranteed or insured by the FDIC or any other government agency.

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