An Intro to Saving for Retirement in the Nonprofit Sector

Are you saving for retirement? According to a 2018 Northwestern Mutual study, 21% of Americans have nothing saved for retirement and one-third have saved less than $5,000.

For healthy finances and peace of mind, read on to educate yourself on what retirement options are available for nonprofit professionals and what you should be asking your employer or financial advisor.

Introducing the 403b and 457b

Depending on where you work, the two most common retirement savings plans for nonprofit professionals are the 403b and 457b.

Here are the key features of the 403b:

• Many public education employers, religious and church-affiliated organizations, and 501(c)(3) organizations offer this type of a plan.
• You’ll need to talk to your employer about how much of your salary (pre tax) you want to invest and how it will be invested. You should also find out if your employer will match your retirement contribution. Currently (2018), the maximum contribution to a 403b account is $18,500.
• You won’t be taxed for your contribution until after you retire and start making withdrawals. However, if you make any withdrawals before you reach the age of 59.5, you’ll pay a 10% penalty. The 403b allows employees over 50 years old to make special contributions to save up to an additional $6,000 per year.

The 457b is similar to the 403b with three important differences:

• It’s offered by state and local government employers, as well as other non-church tax-exempt organizations.
• Like the 403b, you won’t be taxed for your contribution—up to $18,500 in 2018—until after you start making withdrawals. However, if you do make withdrawals before the age of 59.5, you won’t be penalized.
• Like the 403b, the 457b allows for that annual $6,000 additional contribution, but it also permits anyone within three years of retirement age to make a special contribution of up to $37,000.

But what about the 401k?

If you read the newspaper, watch the news, or have friends in the private sector, you’ll have heard about the 401k retirement plan. The 401k is offered by many non-governmental employers and is similar to the 403b—think of the 403b as the 401k of the nonprofit world. Since the administrative costs of the 403b are lower than the 401k, it’s the more popular option with nonprofits.

A word on pension plans

Some government employers do offer a pension plan. This is a fund that your employer contributes to annually and that will pay out a specific monthly amount after you retire. Your employer’s contribution is determined by an actuarial accountant every year so that it meets your promised benefits.

Opening an IRA

Whether or not your employer offers a retirement plan, you may want to explore opening your own IRA (individual retirement arrangement) account. There are two types: traditional and Roth.

Here’s what you need to know about the traditional IRA:

• You can make a contribution if you earn a taxable income and are under 70.5 years old.
• You can put away either $5,500 per year or your taxable annual compensation, whichever amount is less. Your contribution is tax deductible.
• You’ll only be taxed once you start making withdrawals after retirement.
• You can make a withdrawal at any time, but as with the 403b, if you’re under the age of 59.5, you’ll be charged a 10% penalty.

The Roth IRA is different from the traditional IRA in two notable ways:

• You can contribute to your account if you earn taxable income below a specified amount.
• Like the traditional IRA, you can invest either $5,500 per year or your taxable annual compensation, whichever amount is less. Your contribution isn’t tax deductible, but your post-retirement withdrawals are not taxable.

The best option for you

To choose the best retirement plan for you, find out what—if any—retirement plans are offered by your employer and do your research. Be sure to double-check the IRS website for information and updates, such as contribution limits (since those change annually). Get in touch with your HR department or a financial advisor to learn more about what’s offered, the pros and cons of each plan, and which will help you meet your financial goals.

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