For teachers returning to school for another year of teaching, or those just starting their career, retirement savings outside of a pension is definitely recommended. One of the places to save is a 403(b). But what is a 403(b), who should use one, and why? Watch and find out the basic information about using a 403(b):
So to start off, what is a 403(b)? Now, if you’re a new teacher, or you haven’t done any investing outside your pension, this may be a new concept for you. A 403(b) is the name of the IRS code it’s set up after. It doesn’t mean anything fancy, but it’s a tax-deferred investment account.
What does it mean? A tax-deferred investment account means that all the money you earn, you are able to save that before you pay any taxes on it. So you can put in contributions every month and it dodges income taxes. So, all that money that you are investing in that 403(b) is going to grow tax-deferred. So that means it’s going to grow, it’s not going to be taxed as it grows, and whatever you got it invested in, it’s growing over those years. As you start pulling money out, that entire amount is going to be taxable.
Who should invest in a 403(b)? Now, when I talk to teachers, I find out it’s usually their default choice. You know, I want to save for retirement, there’s a 403(b) guy in our lounge, and we started saving through that 403(b). Didn’t put much thought it to it, and that’s okay. As long as you’re doing something, that’s fine. But, it may not be the best option for you.
If you’re in the low tax bracket, you really don’t have any benefit from it, skipping out in some taxes right now. If you’re in a higher tax bracket, if your income, or your household income is pushing up twenty-five percent and above, it may be a good option for you to invest in a 403(b). If your bracket is below that twenty-five percent, you may get a better bang for your buck somewhere else (and we’ll talk about that later).
So, why should you use one? Let’s say you’ve got two options. One is a 403(b) and another one you can just save to a saving account or a regular investment account. A 403(b) is sheltered. You’ve got that tax deferred growth. It’s going to be purely for retirement. You’re not going to be able to tap it any time before that without incurring some penalties and taxes.
Another reason for investing in that 403(b), it’s easy. It’s coming straight out of your paycheck. You do not have to think about. You’re not even seeing that money. It’s just going right in that account. You can choose what to invest it in. You can have the 403(b) representatives help you out with that, too. And then, it’s set. It can auto rebalance. It can do all these wonderful things inside that account. So the investing is made easy. You just have to specify how much you want to do.
So the last thing we’ll cover today with investing in 403(b)s is: how do you start contributing to one? Well, you can do two things. One, you got to find a 403(b) that you’re going to invest in. Your HR Department at school is going to have a list of vendors. You’ll be able to talk to these vendors; meet with them; find out exactly how they work; what to invest in, and what option you have. Then you can pick the best one that meets your needs.
The second thing you need to do is; you’re going to have to specify how much per pay check you’re going to invest in that 403(b). One tip for you here, talk to the rep of the 403(b) company and ask him how often does he talk to people that he does accounts for. You want to be talking to them frequently throughout the year. Find out their insight, what they’re encouraging people to do. Are they suggesting any allocation changes? Ask the most difficult questions. You do not want a rep to open your account and never talk to you again. Unfortunately, some of them do that.