Here are the basics of 403(b) plans, although plan rules may vary:
Participants may be able to make pretax or Roth contributions. Some organizations match these contributions.
Participant contributions are 100% immediately vested, but employer (e.g., matching) contributions may be subjected to a vesting schedule.
Public education organizations, including primary and secondary schools, state colleges and universities, and junior colleges
Nonprofit organizations, including hospitals, religious organizations, charitable institutions and social welfare agencies
After the first employee is permitted to participate, the employer must extend the offer to participate to all employees of the organization. The employer may exclude certain employees from the plan:
Each employee participating in the plan determines how much money is to be automatically contributed from each paycheck. Generally, participants can invest an annual maximum of $23,000 in 2024 or $30,500 for those 50 or older.
Traditional contributions are made before taxes are deducted, which means that income taxes are not paid at the time of investment. Instead, taxes on both contributions and earnings are paid when the money is withdrawn.
Plans may allow Roth contributions, which are made with money that has been taxed. Money that’s been taxed won’t be taxed again. Additionally, earnings are tax- and penalty-free for qualified distributions.*
* Withdrawals from Roth accounts are tax- and penalty-free if the account was established at least five years before, and if the participant is at least 59½ years old, disabled or deceased. For nonqualified distributions, earnings are taxable and may be subject to a 10% early withdrawal penalty.
As an added incentive for their employees to invest, some employers make matching contributions to participant accounts. Some employers match employee contributions dollar for dollar, while others contribute a percentage of what employees contribute. Employers may also make discretionary (profit-sharing) contributions into participant accounts.
Participants always own 100% of their contributions. With employer contributions, participants often become vested over time.
Distributions from 403(b) plans are generally allowed at age 59½, or if the employee becomes disabled or leaves the employer sponsoring the plan (penalties may apply for early cash-out distributions). However, there may be ways to access money early.
There are a number of options an employee can take when leaving the job:
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The investments available in the plan — the most common options are mutual funds — are generally determined by the employer or the plan provisions, but participants can decide which of the options to use.
American Funds® offers a wide range of investments.
Convenience
Select a target date fund that is based on your nearest anticipated retirement date. A single investment provides a fund-of-funds portfolio of actively managed American Funds aligned with an investor’s time horizon.
Customized
Investors can build an investment portfolio of mutual funds (excluding tax-exempt funds) to meet their specific preferences and needs.