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Believe it or not, summer has arrived in Southwest Montana, and our “blink or you’ll miss it” summer is well underway. For all of us across this great country, summer’s arrival brings with it barbecues, vacations, outdoor activities, and for students the joy of another well-deserved summer break.  

For our wonderful educators out there, it is hopefully an opportunity for a little relaxation, some quality time with family, tackling some household projects, and an opportunity to organize other aspects of their lives. We all know it’s a race to squeeze it all in before summer ends and the school year begins, but summer is a great time for those in the education field to review their finances.   

We won’t sign you up for financial literacy summer school, but the class is in session for those that are interested. While most professions come with a 401(k), some, like teaching, often have a 403(b)-deferral distribution. This is a tax-sheltered annuity plan or TSA designed for certain employees of public schools and other 501(c)(3) or tax-exempt organizations. This could include but is not limited to, government employees, medical professionals, librarians, and self-employed ministers. The plan is named after the section of the tax code that describes it and is similar to a 401(k), but with a few key differences.

Like a 401(k), a 403(b) account enables you to defer a portion of each paycheck for your retirement, and your employer may match some of your contributions if it chooses. A 403(b) may be either tax-deferred, meaning your contributions reduce your taxable income this year and you pay taxes on distributions in retirement, or a Roth 403(b), if your employer chooses to offer this option, meaning you pay taxes on your contributions this year and your money can enjoy tax free growth potential. 

One benefit is the tax advantages you receive on your savings as well as future retirement income.  A second key benefit is high contribution limits. In fact, you may contribute up to $22,500 yearly to a 403(b) in 2023 or $30,000 yearly if you’re 50 or older and of course, there is the potential for an employer match. 

Last, extra catch-up contributions may be available to adults 50 and older. 403(b)s may allow for participants who have worked for the same employer for at least 15 years to contribute up to $3,000 in additional funds per year to their accounts.

There are a few drawbacks to remember when contributing to a 403(b) account.  First, in most cases, there are fewer investment options other than an IRA. 

Some plans have high fees so be sure to understand your plan’s fees so that you can attempt to avoid higher fees and maximize your returns.  Like other retirement plans, there may be early withdrawal consequences. If you withdraw funds from your tax-deferred 403(b) before age 59 1/2, you’ll pay a 10% early withdrawal penalty in addition to the distribution being taxed as ordinary income in the year taken, although the additional tax is waived if you have a qualifying reason, such as a large medical expense. For a Roth 403(b) you can withdraw contributions you made anytime, tax- and penalty-free. However, you may have to pay taxes on the earnings. To avoid this, you must wait until you reach the age of 59 1/2 and the account must have been open for at least five years. Otherwise, the distribution of earnings may be subject to taxation as ordinary income and a 10% additional tax. As with a tax-deferred 403(b) there may be ways to have the 10% additional tax waived if you have a qualifying reason.

Finally, some plans are not subject to ERISA. The Employee Retirement Income Security Act (ERISA) institutes minimum standards for retirement plans, including reporting and fiduciary standards, to protect employees. But many 403(b)s aren’t subject to ERISA. That doesn’t mean they’re bad plans, but you should do some more research to decide if it’s the right home for your money before you begin contributing.

Regardless of your chosen profession or hobby, summer should be a time for relaxation, reflection, and a general reboot of your physical and mental well-being.  With this in mind, enjoy the weather, your loved ones, your passions, and as always enjoy the ride!

Scott L. Brown is the CEO and Founding Partner of Shore to Summit Wealth Management.  His wealth management career spans more than 25 years and he currently works and lives in Bozeman, MT with his wife and two sons.

The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. 

Wells Fargo Advisors financial network is not a legal or tax advisor. 

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security, including the possible loss of principal. Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. This is not a recommendation to invest in any specific securities.

Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC. Shore to Summit Wealth Management LLC is a separate entity from WFAFN

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