By Rev. Dr. Patricia Hunter, CFP®
Retirement savings plans such as the 403(b) plans that MMBB Financial Services provides offer benefits to both employees and employers. How can employees benefit from having a 403(b) plan and what is the best way to make the most of your 403(b) plan? For many, saving for retirement is one of the largest goals they will need to fund. When saving for any large goal whether it is retirement or buying a home, the key is to start saving as soon and as frequently as possible. For a goal like retirement, savings made through a workplace plan like a 403(b) plan can be an efficient way to build a retirement nest egg. Having a strategy for retirement savings that is convenient is both wise and prudent. Scripture reminds us that, “Wise people think before they act; fools don’t—and even brag about their foolishness.” (Prov. 13:16)
So, what is a 403(b) plan? The main difference is that 403(b) plans can only be offered by organizations that are exempt from federal income tax such as public schools including colleges and universities, nonprofit hospitals and healthcare agencies, charities and religious organizations. These plans offer employees an efficient, cost-effective way to save for retirement and are similar to 401(k) plans maintained by for-profit corporations. Just as with a 401(k), a 403(b) plan allows employees to defer a portion of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until you make withdrawals at retirement.
A major advantage of a 403(b) plan is the generous contribution limit. Employees can make pretax salary deferrals up to $18,500 per year (for the 2018 tax year). If you’re age 50 or order, you can defer an additional $6,000 catch-up contribution for a total of $24,500 or 100% of your compensation, whichever is less. Deferrals are subject to Social Security and Medicare taxes but not federal income taxes. Employers may choose to make contributions to their employees’ accounts, making it even easier and providing greater incentive to save. With 403(b)plans, employees may also take loans or hardship distributions. However, under the age of 59 ½ early withdrawals are subject to a possible 10% penalty.
A 403(b) plan offers several retirement savings benefits:
• Contributions to the plan are tax deductible.
• Savings grow tax-free.
• Taxes are paid only on distributions; when many retirees are in a lower tax bracket after retirement.
• Plans allow for employer contributions or employer matching contributions that can lead to increased retirement savings.
• Most plans offer flexible investment options such as the ability to invest in mutual funds through custodial accounts.
• Some plans offer a combination of mutual funds and annuities.
To maximize retirement savings benefits, begin contributing as early and as often as possible. A good strategy to use is to set up an automatic salary reduction plan through your employer.
For employers, offering the right benefits can help you attract and retain the best employees. Benefits such as 403(b) plans, offered through an employer-sponsored plan will far exceed what an individual could accumulate saving on their own through an IRA, especially when you factor in the potential for employer contributions and higher employee contribution limits than traditional IRAs.
What is the benefit of offering a 403(b) plan? The biggest advantage is that the plan serves as a vehicle to attract talented employees. Structuring a plan that your employees see as valuable is key. In general, there are three types of contribution strategies. Each employer must decide which one best fits their organization and budget.
The first type is non-elective employer contributions. These contributions are made by the employer without a matching requirement. The employer contributes regardless of whether the employee elects to make contributions. The second type is elective deferral/salary reduction contributions. These are pre-tax contributions that employees make as either a percentage or fixed dollar amount each pay period. The third type is matching contributions. These are employer contributions that are made based on an employee’s elective deferral. For example, an employer may match dollar for dollar the first 3% of every dollar an employee contributes. Thus, if an employee elects to save 5% of his/her salary, the employer will match at 3%, resulting in a total contribution of 8%.
Employers can use any combination of contributions, but the goal should be to encourage employee participation that results in a healthy savings rate. The 403(b) plan is advantageous for employees and employers. Employees gain the benefit of retirement savings that grow on a tax-deferred basis and employers can offer a benefit that will help them to attract and retain employees.
MMBB Financial Services is the official benefits plan provider for NBCUSA. Inc. We can help your church set up its retirement plan and offer 403(b) plans to your pastor and church staff. Contact us to get started at firstname.lastname@example.org or 800.986.6222.
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