A 403(b) plan is a retirement plan offered to employees of the public education system and offered to employees of some non-profit organizations.  Below is a quick overview of the 403(b) rules, and then a guide on how to choose the right 403(b) vendor while working, and what to do with your plan once you retire.

403(b) Plan Basics

With a 403(b) plan the rules and limits on contributions, withdrawals, required minimum distributions, and loans are the same as the rules for 401(k) plans.

Below are some of the basics:

• You can contribute earned income by having it withheld from your paycheck on a pre-tax basis. This is called a salary deferral contribution. 
• Investment earnings grow tax-deferred.
• You’ll pay ordinary income tax on any withdrawals and if a withdrawal is taken prior to age 59 ½ you’ll also pay a 10% penalty tax, unless you qualify for a hardship withdrawal, take a loan, or were over age 55 when you retired.
• You have limited access to your funds while employed by the employer offering your 403(b) plan.

403(b) plans may also offer you the ability to make what is called a Designated Roth contribution, where you contribute after-tax money. The rules on Roth contributions are different than those listed above.

How to Choose the Right 403(b) Plan Vendor for You

With organizations that offer 403(b) plans they typically allow many different 403(b) vendors. For example, in California there are over fifty-seven 403(b) plan vendors to choose from. (Compare this with a 401(k) plan where you have one plan provider.) It can be very challenging for the average person to try to compare so many different 403(b) vendors.

You choices can be categorized into mutual fund or insurance company sponsored plans. 

Mutual Fund Sponsored 403(b) Plans While Working

You are likely to have lower fees and less restrictions (meaning lower surrender charges) if you use a mutual fund sponsored 403(b) plan. It is best to look for a low cost choice like Vanguard’s 403(b) plan. If Vanguard is not an option, look for plans that offer index mutual funds or mutual funds with low expense ratios.

Insurance Company Sponsored 403(b) Plans While Working

You will also see many choices offered by insurance companies. 403(b) plans offered by insurance companies may have some guaranteed benefits - but will also have higher fees. If you need guaranteed benefits, the higher fees might be worth it. Most teachers will already have a pension benefit that is guaranteed so they are not likely to need the additional guarantees from a high-fee insurance company sponsored 403(b). A non-profit employee who has no pension and only has a 403(b) plan may want an insurance company sponsored plan if it provides guaranteed income for them in retirement.

Your 403(b) plan might be a great option while you are working but it may not be the best option once you retire and need to regularly withdraw money. The good news: once you retire you can rollover your 403(b) to an IRA. Within your IRA you can structure your investments in a way that will most closely match your withdrawal needs.  

Consolidate Your 403(b) with Other Accounts When You Retire

Once you retire, you do not have to leave your money in your 403(b) plan. The decision as to what do with it will depend on many factors, such as what type of plan you have, mutual fund or insurance company, as described below.

Mutual Fund Sponsored 403(b) - After You Retire

Once you are retired you can combine your 403(b) with other retirement accounts like an IRA or 401(k). As I explain in 7 Reasons to Consolidate Retirement Accounts this is a smart move for most retirees. It will make managing your money and required minimum distributions much easier during your retirement years.

However, if you have no other retirement accounts and your 403(b) plan has index mutual funds in it, maybe it will be best for you to leave it there and draw money out as needed or required.

Insurance Company Sponsored 403(b) - After You Retire

If you have an insurance company sponsored 403(b) plan you may want to check to see what kind of guaranteed income options they could provide to you once you retire. Many insurance company plans offer the option to take an annuity income stream. For those with no pension benefit, this may be an attractive option.