How To Set Up A 403(b) Plan In 2024

Organizations like churches, hospitals, and public schools offer an exclusive retirement savings plan named a 403(b). It allows employees of these organizations to save money for their future. 403(b) comes with both options; pre tax or post tax.

Before setting up a plan, you must review the pros and cons of 403(b) and other plans. Discuss with experienced finance experts and financial advisors, and do your research. 403(b) is less common compared to 401(k).

Pre-approved 403(b) plans are better than individually designed ones in several ways. They cost less and comply with legal requirements. They also offer support when changes apply to 403(b) plans.

Let’s explore how to set up a 403(b) plan, how to invest and withdraw money, and the advantages and disadvantages of this plan.

How To Start A 403(b) Plan – Eligibility for Participation

The IRS has specific rules about who can open a 403(b) retirement savings plan. You can avail this plan if you work for one of these types of organizations:

•  A tax exempt educational organization or a public school system that falls under section 501(c)(3) of the Internal Revenue Code.
•  A church or a church related organization that does not follow the IRS regulations on retirement plans.
•  An agency of the public health service, a hospital service cooperative, a university of the uniformed services, or a civilian staff or faculty member of the uniformed services.

If you are unsure whether your employer has a 403 (b) plan, ask your HR department or manager.

How to Set Up and Manage Your 403(b) Plan?

You must complete some paperwork and decide how much and where to put your money when setting up a 403(b) plan. Here is the detailed document for pre approved 403(b) plan that you need to fill up: irs.gov/pub/irs-tege/403b_lrm0313.pdf

Additionally, here are the main steps you need to take:

1. Select A 403(b) Provider

Your employer may have a list of approved providers for you to choose from, or you may have the option to pick your provider. A 403(b) provider is a financial institution that offers investment products and services for your plan, such as mutual funds, annuities, or brokerage accounts.

2. Fill Out an Enrollment Form

When filling out the 403(b) plan form, ensure you have listed your personal and financial information accurately, including your name, home address, social security, beneficiary designation, and contribution amount.

Moreover, you have to sign a salary reduction agreement authorizing your employer to deduct and deposit a certain percentage or dollar amount from your paycheck into your 403(b) account.

3. Decide How to Invest Your Money

403(b) plan offers different investment options; it is up to you how you want to allocate your money to it. Choose a combination of stocks, bonds, cash, or other assets. It depends on your risk tolerance, financial goals, and time horizon. You can also change your investments at any time, subject to the rules and fees of your provider.

How to Save and Withdraw Money from Your 403(b) Plan?

Two key retirement savings management aspects are saving and withdrawing money from your 403(b) plan. Here are some tips and tricks to help you optimize your plan:

1. Save Regularly and Consistently

The more you save, the more you can take advantage of the power of compound interest, which is the interest you earn on your savings. Dollar cost averaging can help you buy more shares at lower prices and fewer when prices are high, ultimately lowering your average cost per share over time.

2. Save According to Your Risk Profile and Goals

Your 403(b) plan has different investment options ranging from low-risk to high-risk, depending on your risk tolerance and goals. Choose a target date fund that changes its asset mix based on your expected retirement date. Reviewing your investments regularly and adjusting as needed according to your age, life events, and market trends is essential.

3. Withdraw Carefully and Strategically.

You can take money from your 403(b) plan when you reach 59 and a half years old. However, you can only do this if you retire, become disabled, or face financial hardships such as medical bills, education fees, or home purchases.

Remember that withdrawals usually incur income taxes, except from Roth 403(b)s with after-tax dollars. There is a 10% penalty if you withdraw before the age of 59.5 years. However, some exceptions exist. You should consult your financial advisor before withdrawing money from your 403(b) plan. 

Conclusion

Setting up a 403(b) retirement savings plan is easy and highly beneficial if you have excess income. Setting it up is easy, and you have pre-approved templates to fill out. You must consult a financial advisor and ask your employer for help with documentation.

 403(b) offers tax reductions, financial growth, and potential employer advantages. Nonetheless, be aware of the possible fees, regulations, and risks involved.

Frequent Questions