A 403(b) is a tax-deferred retirement savings plan available to certain public sector employees. While there's no way to accurately predict the future performance of investments, you can use historical returns to estimate how big your retirement nest egg in your 403(b) could become.
What is a 403(b) plan?
A 403(b) plan is a tax-deferred retirement plan available to certain employees of public schools, tax-exempt organizations, and religious organization. This type of account is also known as a tax-sheltered annuity, or TSA.
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Tax-wise, these accounts work just like the more-familiar 401(k) retirement plan. Specifically, qualified contributions are not included in the participant's taxable income, and will not be taxable until the participant begins withdrawing money in retirement. Additionally, investment earnings in a 403(b), such as capital gains and dividends, are not taxed until they are withdrawn.
Many 403(b) plans offer a Roth contribution option, which has valuable, but different tax benefits. Roth contributions are not excluded from taxable income, but eventual withdrawals of Roth contributions and the gains that result from them will be tax-free if they are withdrawn as qualified distributions.
403(b) contribution limits
For the 2017 tax year, eligible employees can choose to have up to $18,000 of their salary deferred into their accounts, with an additional $6,000 catch-up contribution allowed for participants over age 50.
In addition, there are additional catch-up contributions that may be permitted for employees with at least 15 years of service. If the plan allows, these employees can qualify for an additional catch-up contribution of as much as $3,000 per year, up to certain lifetime maximums.
In addition, employers may (and often do) choose to contribute money on behalf of their employees, usually as part of a matching program. Including employer and employee contributions, total additions to any given 403(b) account can be no more than $54,000 in 2017, or $60,000 if the account owner is 50 or older.
How to estimate your 403(b)'s value at retirement
Your 403(b)'s value at retirement depends on two main variables -- how much you and your employer contribute to the plan, and how your investments perform.
Obviously, the amount you choose to contribute to your 403(b) plan is the variable that's within your control. If you contribute $10,000 per year to your plan for 20 years, you'll have deferred a total of $200,000 of your compensation.
On the other hand, there's no way to accurately predict your investment performance. Having said that, we can use historical trends to estimate what your account might be worth, especially if you're still a number of years away from retirement.
Over long periods of time, stock-based investments have averaged 9%-10% annual returns and bond investments have averaged 4%-5%. So, it's entirely reasonable to expect a properly allocated 403(b) plan to generate long-term annualized returns in the 7% ballpark. If your plan does better, great, but it's smart to keep your expectations reasonable.
Having said that, here's a calculator that can help you estimate how much your 403(b) could be worth by the time you retire, using your account's current value, time until retirement, and your and your employer's contribution rates. Note that "employer match" refers to the percentage of your contributions they're matching, and that "maximum employer match" refers to the maximum percentage of your salary that can be taken into account for the matching program.
Editor's note: The following language is provided by CalcXML, which built the calculator below.
* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.
FAQs
The Average Return on a 403b
Historically, the long-term average return for the U.S. stock market is around 7% to 10% per year after adjusting for inflation. However, your actual return could be higher or lower, depending on your circ*mstances and the market conditions.
How much money do you need to retire with $100000 a year income? ›
For example, if you want to retire at age 60 and receive $100,000 each year for the rest of your life, you will need $3.8 million saved in an annuity. This money will guarantee you a monthly income for the rest of your life.
Does money in a 403b grow? ›
Roth 403(b)
If your employer offers this option, grab it with both hands! With a Roth 403(b), you're contributing after-tax dollars, so the money you put into it grows tax-free and you won't pay any taxes when you take the money out in retirement. But remember, only your contributions grow tax-free.
When can I withdraw from my 403b without paying taxes? ›
What is a qualified (tax-free) Roth 403(b) distribution? To qualify for tax-free distributions from your Roth 403(b), you must meet the following requirements: Age 59½, death, or disability, and. Hold account for five years.
What is the average 403b balance at retirement? ›
Fidelity Investment's latest analysis of its retirement accounts reveals Americans have, on average, six-figure balances in their IRA and 401(k) retirement accounts. As of the first quarter of 2023, the average balances in an IRA, 401(k) and 403(b) were (respectively) $109,000, $108,200 and $97,900.
Is a 403b enough for retirement? ›
The Bottom Line. A 403(b) plan is a great retirement plan for individuals working for nonprofit organizations. It operates similarly to a 401(k) plan and comes with many benefits, such as being tax-deductible and tax-free, having the option of a Roth IRA, an employer match, and various catch-up contribution limits.
What percentage of Americans have $100000 for retirement? ›
14% of Americans Have $100,000 Saved for Retirement
Most Americans are not saving enough for retirement. According to the survey, only 14% of Americans have $100,000 or more saved in their retirement accounts. In fact, about 78% of Americans have $50,000 or less saved for retirement.
Can you retire at 60 with $2 million dollars? ›
A retirement account with $2 million should be enough to make most people comfortable. With an average income, you can expect it to last 35 years or more. However, everyone's retirement expectations and needs are different.
What age can you retire with $2 million? ›
If you have multiple income streams, a detailed spending plan and keep extra expenses to a minimum, you can retire at 55 on $2 million. However, because each retiree's circ*mstances are unique, it's essential to define your income and expenses, then run the numbers to ensure retiring at 55 is realistic.
What are the disadvantages of a 403 B? ›
Pros and cons of a 403(b)
| Pros | Cons |
|---|
| Tax advantages | Few investment choices |
| High contribution limits | High fees |
| Employer matching | Penalties on early withdrawals |
| Shorter vesting schedules | Not always subject to ERISA |
1 more rowMay 4, 2023
Consider rolling over all or part of your 403(b) into another account like a 401(k) or a traditional or Roth IRA to benefit from varied investment options or better money management during retirement.
Can a 403b lose value? ›
Yes, you can lose any amount of money when you invest in 403(b). Your investments can fluctuate with the rise and fall of the stock market. You may want to consider your risk tolerance before you invest and adjust your investment accordingly.
Does 403b affect Social Security? ›
Employee Traditional 403(b) pretax deferrals reduce Federal, State, and Local income taxes but are subject to Social Security (FICA) tax1. Employee Roth 403(b) after tax contributions are subject to State, Federal, and Social Security (FICA) taxes. Employee deferrals are always 100% vested.
How do I not pay taxes on my 403b? ›
Choose a 403(b) Plan
The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently but is tax-free (including earnings) when distributed.
Can I cash out my 403b at age 65? ›
Similar to a 401(k), 403(b) account holders can start taking distributions in the year they leave work as long as they turn 55 or older in that same year. This is commonly referred to as the rule of 55. The biggest caveat is that all funds must remain in the 403(b) plan for early withdrawals to remain penalty-free.
Why does my 403b have a negative rate of return? ›
Many factors can cause an investment to have a negative rate of return (ROR). Poor performance by a company or companies, turmoil within a sector or the entire economy, and inflation all are capable of eroding the value of the investment.
What is a reasonable rate of return on a retirement account? ›
But while you may be aware of how much money goes into your 401(k) every month, do you know what the average return on a 401(k) investment is? The answer is typically 5% to 8% per year.
What is a good rate of return on retirement plan? ›
Generating sufficient retirement income means planning ahead of time but being able to adapt to evolving circ*mstances. As a result, keeping a realistic rate of return in mind can help you aim for a defined target. Many consider a conservative rate of return in retirement 10% or less because of historical returns.
What is a good rate of return on retirement account? ›
Many retirement planners suggest the typical 401(k) portfolio generates an average annual return of 5% to 8% based on market conditions. But your 401(k) return depends on different factors like your contributions, investment selection and fees.
