What is a 403b?
A 403b plan, also referred to as a Tax-Sheltered Annuity (TSA) plan, is a retirement plan designed for employees in nonprofit organizations and government workers in public institutions. Examples of those who may have access to such a plan include hospital workers, public school employees, police officers, fire service personnel, and employees of religious organizations. The structure of a 403b plan is similar to a 401k plan, offering tax advantages that allow employees' earnings to grow tax-free until withdrawal.
When comparing the 403b account with other retirement plans, there are a few notable distinctions:
A 401k retirement plan is available to for-profit workers, typically those in the private sector.
A 403b retirement plan is offered to nonprofit and government workers.
There may be employer-matching contributions in some 403b plans.
There are traditional (before-tax dollar) and Roth (after-tax dollar) contribution options, each with its own tax implications.
The maximum annual contribution limit set by the IRS elective deferral limit is $19,500, with an additional $6,500 catch-up contribution for individuals aged 50 years or older.
Withdrawals must begin by age 72 to avoid a 10% early withdrawal penalty.
How to use a 403b Calculator?
A 403b calculator is used to evaluate the growth of your monthly contribution to a 403b retirement plan. To use a 403b calculator, you need to input various parameters encompassed in two main sections; 403b Employee savings plan section, and the 403b Employer contribution section.
Here is a general step-by-step guide:
In the Employee savings plan section, indicate your:
Current salary (which can be hourly, weekly, monthly, or annual)
Contribution percentage (the percentage of your salary transferred monthly to your 403b account)
Age of starting your 403b account
Planned retirement age
Current amount in your 403b account
Expected annual rate of return
Expected annual salary increase
In the Employer contribution section, specify:
Contribution percentage (the percentage of your salary that your employer transfers monthly to your 403b account)
Annual employer contribution
An actual example to demonstrate the calculator
To illustrate 403b calculations, let's assume:
Current annual salary: $60,000
Employee contribution percentage: 10%
Contribution starts at age: 30
Planned age of retirement: 65
Current balance: $0
Expected annual rate of return: 5%
Expected annual salary increase: 2%
Employer contribution percentage: 5%
First, calculate the annual contributions:
Your total annual contribution:(10% * $60,000) = $6,000
Employer contribution:(5% * $60,000) = $3,000
Total Annual contribution:($6,000 + $3,000) = $9,000
Then, calculate the growth of these contributions over time, considering the rate of return, and arrive at the total balance at retirement. Repeat these calculations annually, adjusting the salary and contributions based on the expected annual salary increase rate, until you reach the planned retirement age.
Remember that these calculations provide an estimated value of the potential growth of a 403b account. Factors such as investment performance and changes in income can impact the actual value.