Teaching comes with intangible rewards as you’re significantly impacting the next generation. There also is the very tangible salary that teachers earn — which often isn’t as much as they deserve to make.
Living on a teacher’s salary is certainly doable, but it requires prudent planning. That planning becomes especially important as you reach retirement age.
If you’re part of the man Gen X Teachers close to retirement age, here’s how you might take full advantage of your 403(b) or 401(a) plan. Either one can have a major impact on how well you’re financially prepared for those upcoming non-teaching years.
Understanding 401(a) and 403(b) Plans
Both 401(a) and 403(b) plans can have a critical role in teacher retirement planning. They’re each an employer-sponsored retirement plan that comes with tax advantages. That simply means they’re offered by your employer (e.g. school or district), and the IRS allows tax benefits when funds are used during retirement.
This isn’t to say that the two plan types are identical:
- 401(a) plans are mandatory plans that employees must contribute to if they qualify, and they can make use of predefined investments. Their annual contribution limits are much higher than 403(b) plans, although most schools and districts don’t require teachers to reach the annual limit (which is $69,000 for 2024).
- 403(b) plans are voluntary plans that employees may use if they qualify. Choosing investments isn’t a free-for-all, but there tends to be a range of options to select from. Contribution limits are lower, but there are catch-up allowances for those 50 or older that Gen X teachers might start taking advantage of.
In many ways, these plans function like a 401(k) for schools and other non-business entities. 401(k)s are limited to for-profit businesses. A 401(a) or 403(b) plan may be just as useful if that’s what your school or district offers.
What is a 403(b) Plan?
You can think of a 403(b) akin to a 401(k) offered by organizations other than for-profit businesses.
LLCs, C Corporations and S Corporations generally can’t offer a 403(b). Schools, 501(c) nonprofits, government agencies and public hospitals generally can’t offer a 401(k) — they can have 403(b) plans instead.
A 403(b) plan is the most common type of retirement plan that schools and school districts offer. There are several key features to these plans.
Employer-Sponsored
403(b) plans are offered by schools and districts that choose to provide this as a benefit. You can’t actively contribute to a 403(b) unless your current employer offers it.
Investment Choices
403(b) plans often don’t offer the same amount of investment options as Individual Retirement Accounts (IRAs) do. Most 403(b) plans have a range of guided investment options, though. You’ll likely find an option that suits your time horizon, retirement savings goals, and risk tolerance.
One common option is an age-based targeted strategy, which will adjust for risk tolerance as you approach retirement age. A financial advisor can share how age-targeted strategies adjust as you get closer to retirement age. If you don’t have a financial advisor, use our free financial advisor tool to get matched with someone who knows retirement planning.
(Investments contain risk, and there’s no guarantee that your portfolio will gain value. Investing can include risk of loss.)
Employer Match
Many 403(b) plans come with an employer match, where an employer will make contributions if you do. Employer matches are typically a percent of what you contribute (e.g. 50%, 100% or 150% of what you put in), and capped at a percent of your pay (e.g. 2%, 3% or 4% of your salary).
An employer match is commonly called “free money,” and is one of the most important benefits of these plans. It’s additional retirement savings that you can get just for making contributions.
Portability
These are portable accounts, which means that you can transfer them when you leave your employer.
If you accept a different position with another employer, you might be able to roll over your 403(b) savings to your new employer’s retirement plan. Your new employer must offer an employer-sponsored retirement plan, and both your current and the new plan must allow rollovers like this. You could potentially roll over into another 403(b) or a 401(k).
You alternatively can roll over a 403(b) into an IRA, regardless of whether you have access to a new employer-sponsored plan. An IRA is an individually directed retirement account that usually has similar tax benefits, but that you fully direct the investments of. This may be your only rollover option if you aren’t taking another job, and could still be the preferable option even if you are.
Before you decide to roll over a 403(b) to any other tax-advantaged retirement account, consult a financial advisor. You’ll want to make sure you’re choosing the best account type to roll over into. There also are specific steps that must be followed, or else you could be faced with a major tax penalty.
We can help you find a financial advisor who’s able to assist with a single rollover if that’s all you need. They can assist with other aspects of retirement planning as well, should you want other help.
Tax Benefits
Funds deposited into a Traditional 403(b) are made with pre-tax income. In other words, your contributions aren’t taxed when you make them.
This tax benefit allows you to invest more than you’d otherwise be able to. That’d likely give you another 22% to invest if you’re earning a typical teacher salary, or perhaps another 12% if you’re new or working part-time. (22% is based on the 2024 federal income tax bracket that goes from $47,150 to $100,525.)
Starting out with 22% more to invest may lead to a substantially larger nest egg come retirement time. You’ll have to pay taxes when withdrawing funds during retirement, but this is still advantageous for a couple of reasons:
- The increased potential earnings usually more than outweigh paying income tax later on.
- You may be in a lower income tax bracket during retirement, paying less on a percent basis.
(Investments come with risks, and there’s the possibility of loss despite any tax benefits.)
Contribution Limits
Like all tax-advantaged retirement plans, 403(b) plans are subject to annual contribution limits. The 2024 annual contribution limits for 403(b) plans are as follows:
- General Limit: $23,000 annually
- Catch-Up: Additional $7,500 annually for those 50 or older
- Special Catch-Up: Additional $15,000 one-time in certain situations
Depending on what part of Gen X you’re in, you might already be able to utilize the $7,500 annual catch-up allowance. You likely can soon, if you aren’t 50 quite yet.
Advantages of 403(b) Plans for Gen X Teachers
While 403(b) plans aren’t the only retirement account option for teachers, they have some distinct advantages over other options:
- Employer Match: Employer contributions can greatly increase how much you have to invest.
- Tax Benefits: Making pre-tax contributions gives you more to invest with, and possibly a larger nest egg come retirement. (Investments can decrease in value.)
- Contribution Limits: The $23,000 contribution limit and $7,500 catch-up allowance are much higher than some other retirement accounts allow. (2024 limits used.)
Maximizing Contribution Limits After 50
One of the most effective strategies for boosting your retirement savings after age 50 is to take advantage of those catch-up contributions. You might save as much as $30,500 annually in these accounts once 50 or older ($23,000 annual limit + $7,500 catch-up allowance).
Saving $30,500 on just a teacher’s salary might not be easy, but you might be able to max out your plan if your family has another income source that complements your teaching.
How to Maximize 403(b) Plans
The best way to maximize your 403(b) plan is to contribute as much as you’re able to. At least try to take full advantage of any employer match, and max out your own contributions if possible.
To that end, there are a few strategies that might let you contribute more:
- Increase your regular contributions whenever you get a raise
- Increase your contributions if you get a boost from another income source
- Increase your contributions for the remainder of the year if you receive a one-time windfall
It’s also important to delay using funds until retirement age, or else you may face steep penalties from the IRS. There are select situations where you might be able to take a loan from your 403(b) if your plan terms allow. This usually isn’t advisable unless absolutely necessary, though, as you’re borrowing from your own retirement savings.
Comparing 401(a) vs. 403(b) Plans
401(a) and 403(b) plans are both employer-sponsored retirement plans with tax advantages, but they have some important differences too.
| Feature | Eligibility | Participation | Tax Benefits | Investment Choices | Employer Contributions | Contribution Limits (2024) | Catch-Up Allowances |
| 401(a) | Employer-Sponsored | Mandatory | Contributions Pre-tax | More Limited | Possible, but Less common | $69,000 | None |
| 403(b) | Employer-Sponsored | Voluntary | Contributions Pre-tax | Less Limited | More Common, but Not Always | $23,000 | $7,500 at Age 50+ |
Roth 403(b) Plans
The Roth 403(b) is an option unique to some 403(b) plans. Not all employers that have 403(b) plans offer a Roth option, and this isn’t an option with 401(a) plans.
The Roth 403(b) structures its tax benefits differently from a Traditional 403(b) or a 401(a), which offer the same retirement tax benefit: The difference can be significant.
Traditional 403(b) & 401(a) contributions are made with pre-tax dollars, which generally allows teachers to invest more than they could if using post-tax income. A larger starting investment may result in growing a bigger nest egg.
Retirement withdrawals taken from Traditional 403(b) and 401(a) accounts are taxed at the time they’re taken. Hopefully a larger nest egg has grown by this time, and your income tax rate might be lower when retired than it is while teaching.
Roth 403(b) contributions are made with post-tax dollars, which doesn’t provide a larger amount to initially invest. Retirement withdrawals taken from Roth 403(b) accounts usually aren’t taxed during retirement, however. Any gains earned don’t get taxed if used during retirement — and not paying taxes on years of potential growth can be a huge benefit.
If your school or district offers a Roth 403(b) option, this is likely a good choice to use. Make sure it’s the right option for you, though, by consulting with a financial advisor.
(Results are not guaranteed, and investments in all accounts may go down.)
Consult a Financial Advisor About Your 403(b)
If you have access to a 403(b) through your school or school district, consult a financial advisor on how to best use the account. These can be great help, especially when integrated into a comprehensive retirement plan. At Invested Better, we can help you find a financial advisor who’ll be able to develop a customized and comprehensive retirement plan.
