What Are the Benefits of Investing in a 403(b) Account?

When transitioning from working as a licensed financial coach to building a freelance writing business, I taught myself to write grant proposals. I volunteered my services for local nonprofit organizations to gain experience, get results, and secure contract work.

Many of the nonprofit organizations I contracted with offered a 403(b) plan for employees. Although I was ineligible for the program as an independent contractor, I understood the benefits of investing in a 403(b) account.

What Is a 403(b) Plan?

A 403(b) plan is a tax-sheltered retirement plan for employees of nonprofit organizations, including charities, schools, and qualified religious organizations. The tax benefits depend on whether the plan is a traditional 403(b) or a Roth 403(b).

Traditional 403(b) Plan

A traditional 403(b) plan has the following tax structure:

• Pre-tax contributions come from an employee’s paycheck and are invested in their account.

• The contributions are deductible on the employee’s federal income tax return.

• These deductions reduce the income tax owed for the year.

• The contributions and earnings grow tax-deferred.

• The employee pays taxes on withdrawals, typically during retirement.

Roth 403(b) Plan

A Roth 403(b) plan has the following tax structure:

• The employee pays income taxes in the year they make contributions.

• Withdrawals are tax-free if the account has been held for at least 5 years and the employee is at least 59 ½ years old, becomes disabled, or passes away, leaving the account to a beneficiary.

What Are the Benefits of Investing in a 403(b) Account?

The benefits of investing in a 403(b) account include the following:

1. High Contribution Limits

The contribution limits for a 403(b) account can annually change. The following limits are for 2025:

• Employees up to age 49 can contribute up to $23,500.

• Combined employee and employer contributions can be up to $70,000.

• If their plan allows, employees aged 50 to 59 or 64 and older are eligible for an additional $7,500 in catch-up contributions, increasing the employee contribution limit to $31,000.

• If their plan allows, employees aged 60 to 63 are eligible for catch-up contributions up to $11,250, increasing the employee contribution limit to $34,750.

• Employees are encouraged to check with the plan sponsor to see if the catch-up contributions are available to them.

If the 403(b) plan allows, employees who have spent at least 15 years working for the employer can contribute an additional $15,000 to their account:

• The contributions can be up to $3,000 over different years.

• The amount an employee can contribute annually might be reduced based on their prior contributions to employer-sponsored plans.

• For instance, an employee who contributed $75,000 or more to employer-sponsored retirement plans over the past 15 years would not be eligible to make additional contributions.

• Employees are encouraged to talk with the plan sponsor to determine how much they can save annually.

2.  Diverse Investment Options

A 403(b) plan offers investments from nationally recognized mutual fund and insurance companies. Employees can modify their investments as their needs change.

3.  Automatic Payroll Deductions

Employees can deduct a specific amount from each paycheck to invest in their 403(b) account. Automatically funding their retirement account helps employees achieve their savings goals.

4.  Potential Employer Match

Many employers match 403(b) account contributions, such as 50 cents for every dollar, or a dollar for every dollar. These matches increase the amount in the account, helping employees reach their retirement goals.

5.  Professional Portfolio Management Services

Many 403(b) plan participants have access to professionally managed portfolios. These programs offer professional asset allocation techniques, investment selection, and ongoing investment management for participants.

 

6.  Dollar-Cost Averaging

Regularly deducting the same amount from each pay period enables employees to purchase more investment shares when prices are low and fewer shares when prices are high. Over time, the average cost per share could be less than the average price per share.

7. Tax Advantages

A traditional 403(b) account provides the following tax advantages:

• Deferring compensation into an account provides immediate tax savings on the contributions, reducing the employee’s taxable income.

• Taxes on investment earnings are deferred.

• Withdrawals are taxed as ordinary income.

• Investors in a lower tax bracket at retirement can save a significant amount of money.

A Roth 403(b) account provides the following tax advantages:

• Making contributions with after-tax dollars means the contributions and earnings can grow tax-free.

• Distributions are tax-free if the account is held at least 5 years and the employee turns 59 ½, becomes disabled, or passes away, leaving the account to a beneficiary.

8.  Compound Interest

Regular contributions to a 403(b) account increase the ability to earn compound interest. Earning interest on interest elevates the account balance, helping the employee reach their retirement goals.

9.  Account Portability

Employees who leave their jobs have the following options for their 403(b) account:

• Transfer the account to the new employer’s program

• Roll the 403(b) account into a traditional or Roth Individual Retirement Account (IRA)

• Convert a traditional 403(b) account to a Roth IRA

Employees are encouraged to consult a tax advisor to determine the best option for their circumstances.  

 

10. Flexible Distribution Options

Many employers with traditional 403(b) plans allow employees to make penalty-free withdrawals after age 59 ½, even if they are still employed. The required minimum distributions (RMDs) generally begin at age 72 or 73. However, employees still working for the employer sponsoring the plan can delay their RMDs until April 1^st of the year after they retire.

Depending on the plan, Roth 403(b) distributions might begin at age 59 ½ or after separation from service. However, distributions are not required until the participant’s death if the account is rolled over to a Roth IRA.

*This information is for educational purposes only.