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hey what's up everyone and welcome to the school of personal finance my name is rich mcCormick and in this video we're going to be talking 403 B plans a [Music] 403 B plan is a retirement plan that is offered to employees of nonprofit organizations schools hospitals religious organizations it's very similar to a 401k plan but there are some big differences so the 403 B you could contribute directly through payroll deduction so the money comes out of your paycheck and it goes over into your 403 B accounts and then inside of your 403 B count you're gonna have a menu of different investment options that you could invest for your future retirement so in that way it's very similar to a 401k the big incentive with the 403 B is that when you make the contributions you did not pay taxes in that year on the money you contributed so for example if you make $50,000 and you contribute $5,000 into your 403 B you will not pay state and federal income tax on that $5,000 in the year you made the contribution and then the money will grow inside of the 403 B tax deferred all of those years then when you take it out that's when you pay taxes on it a big difference with the 403 B as opposed to the 401 K in my experience I haven't really seen any 403 B plans that have a match there might be some out there but in the K through 12 school district universe or in the Community College universe I haven't seen any that offer an employee match so it's really just going to be the employee putting their money into the plan without getting a match from you know the university or the school district that they work out of the hospital that they work at now the biggest difference with a 403 B plan is the investment options the investment vehicles that are available so 403 bees are also called TSA accounts which stands for tax sheltered annuity so most 403 B plans you find annuity products as the investment options so now there are some pros and there are some cons to annuity products so for example in typical school district you might have 15 different vendors or providers that sell annuity products to the teachers of the school district so there might be some big-name companies like AXA MetLife voya Valek so these are all insurance companies that have salespeople that go around the schools and sell the 403b product to the employees of the school the downside with this is that these annuity products they could really be terrible so the expenses the costs inside of these annuities can be sky-high so where a typical 401k plan a good 401k plan you know might have very low costs to them the investment options the funds they could have Vanguard funds where the expense ratios are very low you know below 1/2 of 1% 30 basis points a quarter of 1% would be a good plan whereas on the 403b side in some of these tax sheltered annuities you could be paying two and a quarter percent two and a half percent in expenses inside of your tax sheltered annuity and this on say it's like highway robbery if you look at that over a 30-year period it kills the growth in the account and you end up paying thousands and thousands of dollars in fees by using this 403 B account one other major downside with a 403 B plan are the surrender schedules in these annuities so in some of these annuities they have what's called like a 9-year so they can even be longer 10 11 12 years surrender schedule so what that means is that when you put money in when you make a contribution it is nine years it has to be in that account for nine years before you could either roll it out to another account or take a distribution from it without having to pay the insurance company a penalty and they might charge like a seven percent penalty so for example if you put ten thousand dollars in in 2019 and here we are in 2026 seven years from now and you want to take that money and take a distribution from it or roll it to another company they might charge you a 7% and 8% 6% they might charge you some you know amount in a penalty just to move that money so on that 10,000 bucks I mean that would be $600 in a penalty if it was a 6% penalty that's a lot of money especially if you want to roll larger songs out to another plan or if you want to take distributions so you have to also be cognizant of how long the surrender schedule is and how steep the penalties are but one good side to some of these annuity products is that they have a high fixed accounts or a high savings account inside of them so if you're investing in your 403 B and you want to put a piece of it in a conservative part of the portfolio that fixed account pays much more than the regular savings account so I've seen people where as they're older and they're getting close to retirement or they're retired they'll use that fixed accounts as their safety net as their you know very conservative option and it pays much higher than a regular savings account that the bank or CD rate but that's really about the only good thing that I could say with these tax sheltered annuity plans so if you're in the school district where that's all you have available to you I highly recommend that you invest outside of the 403 B plan that you go and you open up a traditional or a Roth IRA through Vanguard or through fidelity or betterment and you invest in a low-cost IRA where you have more control of the investment options and the funds that are available to you now with a 403 B you do have some options to get money out if you're really needed to so if you fall on hard times there are some hardship provisions in the 403 B where if you fit and one of those exceptions you could take money out through a hardship withdrawal you'll still owe taxes and the penalty on that money but it allows you to at least take the money out of the 403 B plan if you needed to like for example if you're facing foreclosure on your home you could take money out of your 403 B to pay for that another way to get money out which is a better option would be through a loan so most plans allow loans but each plan is specific but most plans will allow loans where you could take out a alone on your 403 B account but you will owe interest to the insurance company to whoever your 403 B provider is another way people could get money out that a lot of people don't know and goes for a 401k also is that if you are 55 and you retire so 55 and older when you retired you could take money out of a 401k or a 403b without paying any penalty on it so you still pay income tax but you won't have to pay a penalty so if you're 57 years old you decide to retire you could take distributions from your 403 B accounts without any kinds of penalties or anything so now here's riches quick tips segments of the video so for my first quick tip with 403 B plan is to think long and hard before you decide to actually use it if all you have available to you are insurance companies and annuities then I do not think it's in your best interest to even enroll in the 403 B plan I would instead use the IRAs Roth IRA traditional IRA after you've exhausted those two and you still want to save money for retirement above and beyond that then you might not have any other option but to use your employer-sponsored 403 B plan so quick tip number two is look at the vendors that are available to you through your employer so go through the list and try to pick out companies that offer low-cost options like for example if you had you know fidelity is one of the options is it the low-cost fidelity where the actual expense ratio on the funds are low-cost look and see if they have Vanguard if Vanguard is one of the options in there chances are you have very low cost index funds and that might be a great option for you so go through the vendor list and see what the actual options are if it's a big insurance company then understand that if you go with it even if you like the salesperson that's walking around the schools if you go with them you're gonna pay for it it's expensive my third tip is to check out target retirement date funds so if you're investing in your 403 B and you're unsure how you should be allocated a target date retirement fund is a great way to go again back to the expenses you want to make sure that it's low cost you don't want to pay more for a target date retirement fund than if you put your own pieces together but a target day retirement fund is a great simple option where you could just choose one fund that corresponds with a date that's around when you want to retire and just invest in that one fund for your retirement and my last quick tip with the 403 B and I to beat a dead horse but it's look outside of the 403b see what other options are available to you see if there's low-cost providers in there it really is the most important thing when it comes to the 403 B you don't have to use the 403 B if your expense ratio is going to be two and a quarter if it's gonna cost you two and a quarter percent year after year after year to invest in the 403 B plan and you're gonna have these long surrender charges it's honestly not worth the other benefits you could save outside of the 403 B plan for retirement that would be my best advice all right so that's it for 4 3 B plans hopefully that was helpful you know for 3 B's are very similar to 401 k's the way that they're taxed the way that they're structured there's a lot of similarities what I tried to focus on today were the big differences and the things that you really need to watch out for so I hope that you found that helpful please if you have any questions about it if you want to talk more about it feel free to email me go to school of personal finance comm you could send me an email through there check out the other videos that I have on the website please subscribe to my email list check out my youtube channel subscribe to my youtube channel and I will see you again soon thank you