Understanding your 403b Retirement Plan and Its Benefits
In today’s episode, we’re diving into a crucial retirement benefit often overlooked by many: the 403b plan. Especially relevant for non-profit workers, like those in school districts, the 403b is a powerful tool for building retirement savings.
Surprisingly, the state doesn’t emphasize this benefit, favoring its own Deferred Compensation Plan (DCP). Why? Well, the DCP generates revenue for the state, unlike the 403b, so they downplay its significance. But fear not, I’m here to shed light on the advantages of the 403b.
I recently shared a success story where one of my clients, facing a tax dilemma due to a denied rollover of sick leave, triumphed after concerted efforts. It’s a reminder to ensure your school district allows the transfer of sick leave into the VEBA account, potentially saving you thousands in taxes.
Now, onto the 403b: a flexible retirement savings plan allowing you to start, stop, and adjust contributions easily. I share insights on contributions, access to funds, taxation, and the importance of selecting the right investment options.
Curious about starting your own 403b? Be cautious, as there are different types—TSAs and 403b7s—and choosing the wrong one can lead to complications. I’ve prepared a list of the top 5 questions to ask before opening a 403b, available for download in the description.
Outline:
00:00 Introduction and Welcome
00:36 Understanding the 403b Plan
02:07 Success Story: Client’s Retirement Savings
04:30 Exploring the 403b Plan
05:59 Accessing Your 403b Plan
08:13 Tax Implications of 403b Plans
09:00 Investing with 403b Plans
10:20 Choosing the Right 403b Plan
Resources
Go here to get advice on your DCP
5 403b Questions You Need To Ask
Transcript
Welcome to another episode of the Washington State Retirement Planning Podcast. I’m your host It’s Ethan Meikle, and on this show, we help you guys understand your Washington State retirement benefits so that you can become more educated in them, make better choices .
So hopefully this will empower you guys to retire earlier, pay less in taxes, and enjoy more of your own free time.
On today’s episode we’re going to talk about a benefit that the state fails to recognize, but it exists everywhere, and many people go their entire careers without ever knowing what it is. So we’re going to shed some light on other than the 403b plan. The 403b plan is for non profits, so a lot of church members Any kind of non profit institutions will have these kinds of things.
School district employees, you guys are considered non profit, you guys therefore have 403b plans available to you. Now if you look on Washington State’s website, on the Department of Retirement, you’re going to see that they don’t talk about the 403b at all. And we’ll talk about why that is in a little bit.
But for the most part, all you need to know is that your 403b is available to you, and it’s something that you can have in addition to your DCP. You see, the state, because they run their own Deferred Compensation Plan, the DCP, they profit from that. Because you put money in there, and they have their investment board control the investments, they have an administrative fee.
So the more money you put into the Deferred Compensation Plan, the more they earn. They don’t have a 403b plan. You put money in the 403b plan, they don’t benefit from it. So therefore, they have refused to acknowledge it on their website. I think in the last year they might have published one article comparing the two and the article went on to say that they’re pretty much the same thing but the DCP is better and they went on some kind of tangent that was completely false.
So I always want to shed some guys light on you that you always want to take what the state says or publish on the website because oftentimes it’s not true.
Alright, now before we dive right into what a 403b plan is, quick update from last week. So last week I was telling a story about one of my clients who recently retired as an administrator in a school district was denied the option to roll over her sick leave into the VEBA plan.
And VEBA again is a Health Savings account that a lot of school district employees have as an option. And if you move your money You’re going to un use sick leave into this, it goes in there tax free, whereas if you cash it out, you have to pay taxes on the whole thing. So because the district failed to acknowledge this or offer this option to her, and her unused sick leave was north of 20, 000, that’s a pretty big, you know, bump in income and tax bill, right?
She ended up paying $4000 to $5000 in taxes extra because of it. So I did my due diligence, I spoke with VEBA, I got in touch with the WEA. And they put me in point with their district rep.
I’m happy to say that this morning I actually got a voicemail from that client. Here’s a clip of it.
I hope you can hear how happy I am because I just got a call from payroll at the school district and they are reversing their decision and magically now able to put that sick leave into VEBA. I know in part that that is thanks to you. You were doing the same.
Leg work that I was doing with WEA and Agreements through EEA and the VEBA people, so they were great. We We won. Thank you for your time. I really, really appreciate it. Chat soon.
So this essentially allows her to defer the entire 20, 000, removing it from her income.
It saves her about 5, 000 in taxes this year. Plus, because she gets to invest it, it’s going to grow for her . So it’s a lot of compounding interest and taxes just saved because the district allowed this move.
, so we got lucky this time around, but , as a follow up action item, make sure your school district Allows you to move your unpaid sick leave into the VEBA account because I can’t guarantee that we’re going to be able to work our magic and get school districts to reverse the decision every time this comes up.
Now it’s never been a problem ever except for this one time and I’m not sure why this district went this far with it. Through our efforts and joining up with the union, we are able to get this revision reversed. And now we have a happy client and saved her about 5, 000 in taxes.
All right, so that’s the good news from this past week. Now let’s roll on with the episode.
So basically, what a 403b plan is, is your version of a 401k plan. So 401ks are savings plans for people that work for for profit companies.
So what this is, is an employer sponsored account that allows you to save more money into for your retirement. So basically what you need to know is that for this plan, you’re able to start, stop, increase, and decrease anytime you want to, so it’s very flexible in how you contribute money into it. There’s no open enrollment, you can stop it anytime you want to, you can increase or decrease anytime you want, so it’s very, very flexible.
Now if you’re wanting to start, stop, or make any of those kind of changes, you just have to let payroll know before they cut payroll, usually by the 10th of the month, as is a pretty good rule. So if you want it to increase next month, loan them by the 10th. Now, because this is an employer sponsored plan, all contributions have to come through your paycheck.
You can’t take money from a savings account or some separate account to fund it on a monthly basis. It has to come out of your paycheck. That’s also the really good thing about it because you set it up once and you kind of forget about it. And mine just goes in there every single month, just systematically gets invested into the plan.
Now, as far as how much you can save into this plan, as of 2024, you can put up to 23, 000 if you’re under the age of 50. And for those over age 50, your max contribution is 30, 500.
It doesn’t matter how much money you or your spouse makes, you can always put money into this type of plan. Now as far as access goes, there’s a couple of different ways you can actually get access to your money. So first and foremost, If you’re age 59 and a half or older, you now have access to your money.
You don’t have to be retired or separated from service like you do to get access to that plan three account. So as soon as you hit that age, you can then start using that money as you want to just pay your taxes if taxes are due. However, if you take your money out before the age of 59 and a half, there’s a 10 percent penalty that applies on top of the taxes owed.
So it’s something you really don’t want to do, but there are a couple of workarounds around it. First and foremost is if you are separated and at least age 55 that 10 percent rule is gone in the 403b plans Before that you’re allowed to take money out either through a hardship distribution or through a loan now It’s going to depend on your employer if they allow those two things Most of them are going to allow you to do a hardship Loans are really going to kind of depend Some school districts allow it some don’t so it’s important to check with yours before you go through that process So basically a hardship withdrawal You have to pay your taxes on it, but you don’t give the money back.
It’s yours to keep to spend on what you want to, but you have to qualify in order to do that. And there are a couple of different things that the IRS will allow you to use that money for. And you do have to provide proof of what you’re going to use that money for, documentation. So, some quick examples of that is if you just need money for a down payment on a primary residence or if you needed to pay off certain medical bills, those are a couple of ways you can get money out of the 403 plan without paying that 10 percent penalty.
The alternative to it is to take a loan out. Now a loan is exactly like it sounds, you’re basically borrowing money from yourself. It sounds kind of funny, but you’re going to take that money out. There are no taxes due. There’s no penalty. You can use it for whatever you want to. You don’t have to provide any kind of reason as far as why you’re going to use that money.
Now that’s because it’s a loan you do have to pay yourself back and you’re going to pay yourself back over five years. Now if you don’t pay yourself back over those five years So, you take a loan and make sure you put it back. Now the interesting part about a 403b loan is just like any other loan, there’s an interest rate that has to be paid to take out that money.
But that interest rate actually gets paid back into your own account, it doesn’t go anywhere else. So, you’re basically borrowing money from yourself and paying yourself back with interest on it. So, it’s a very smart way. To leverage if you’re trying to pay off some other high interest debt or you just wanted to Get by some hard times now as far as how 403b plans are taxed Probably about 95 percent of all 403b plans are set up as a traditional Pre tax investment.
I put my money in I get a tax deduction I’ll pay my taxes on it down the road and some of you guys may actually have the option to use a Roth 403b Which is pretty much exactly like how a Roth IRA works. You’re paying your taxes on the money today. It’s going to grow tax free and you’re never going to owe tax on that money ever again.
So that’s a pretty good investment to have as well, but very few school districts allow you to do that. So if you currently have a 403b plan There’s a pretty good chance it’s a pre tax version here,
now, it’s important to know that these 403 plans are really just a shell or an account type. It’s not in itself an investment. It actually houses the different investments in it, so you actually can pick and choose how you want the plan to be invested. Now, the options you get to select from, it’s really going to depend on the company you selected.
To open your 403b plan with. Now there’s a whole slew of different companies you’re allowed to use. Every school district has its own approved list of who you can use. You can only use a 403b from one of those providers. So it’s going to kind of depend on what your school district allows. So having a 403b plan set up and working for you is a really smart idea and I encourage everyone to have some kind of savings going on on an ongoing basis and the 403b really makes things easy.
Set it up once and you forget about it. And it’s going to go in every single month. Now this is highly recommended for people on plan two because if, right, if you remember, you actually don’t have any kind of savings built into your pension plan like they do on plan three. So you may retire with this big old pension, but it’s just a fixed income.
And if anything comes with retirement, you’re gonna have no extra cash to draw on. So it’s really important to have some kind of savings set up on the side. 403b is a great tool for that. For people on plan 3, this is also a good option because even though you may have a savings account set up, most people will default into that lower rate.
You’re doing, you know, 5 or 6 percent a year, and maybe you’re wanting to put in more away now, so you can actually retire earlier or just have more money down the road. So the 403b works well for you guys as well.
now with all the information out there, some of you might be thinking, how do I go ahead and even start to get a 403b plan?
How do I open my own 403b account? Now before you go that far, I want you to take a pause here, and the thing to know is that there’s actually two completely different types of 403b plans. , so you know they’re both called 403b’s, they work a little bit differently than each other.
Some of them are known as TSAs, tax shelter annuities, and some of them are 403b7s or mutual fund non annuity based 403b plans. And there’s absolutely no way of knowing which one you’re getting into unless you know the right questions to ask and what to look for. Because everyone was going to tell you they’re TSAs or they’re 403b’s, they’re interchangeable, payroll labels, non annuities as annuities on your paycheck.
So it is completely confusing unless you know. What to get into and look for and that’s what we’re going to be covering on the next episode.
It’s important because choosing the wrong one is going to cause you A ton of headache, pain, it’s going to be an expensive, sticky, messy situation to get out of.
It could take weeks, months, it’s going to require phone calls, penalties, so you want to make sure you get the right 403b plan from the get go so you can avoid all of that hassle.
In fact, I actually put together a list of the top 5 questions you need to ask. Before opening up a 403b plan. I actually have that link in the description below for a free download. If you guys want to get it, go ahead and click on that link
I also remember that if you guys need investment advice on plan three DCP, that’s also available on our website.
Also, we’re going to be launching our investment advice service on 403b plans coming out here shortly. There’ll be a link in the show notes below if you’d like to join the waitlist for when that’s ready to go. So just like the service we offer for DCP and plan three, this service would allow us to write investment advice on 403b accounts, no matter who, what provider you use.
So you could have money at. Vanguard, Fidelity Spire, Equitable. It doesn’t matter what company it is. Money doesn’t have to move. We just provide you with the investment advice for a flat fee. And it’d be your responsibility to go ahead and execute the trades. That way you can get advice without having to pay high management costs or have to move any money around.
So stay tuned and join that waitlist for more information on that service.
And until next time, remember that your future depends on what you do today.