A 403(b) is a type of retirement plan akin to a 401(k) plan offered by corporations. The main difference is that a 403(b) plan is only available to certain public school employees, nonprofit organizations or members of the clergy. When you contribute to a 403(b), your employer will withhold the amount of your contribution from your paycheck before it is taxed, allowing you to make a pre-tax contribution. Money in the 403(b) grows tax-deferred until you withdraw it. You can invest your 403(b) funds any way you want among the typically limited options your employer provides.
Review your investment options. Your employer might contract with one or more financial services firms to offer investment choices for your 403(b) plan. Even if a firm has an extensive mutual fund lineup, not all of the company's options may end up in your particular 403(b) plan. Your plan administrator will be able to provide you with all of your available choices.Step 2
Estimate the time until your retirement. The longer you have until retirement, the more aggressive you can be with your investment choices, as you have a longer time to recover from any short-term losses.Step 3
Evaluate your risk tolerance. Over the long run, stock funds typically outperform bond funds and money market funds, but they carry higher risk. If you can't handle the ups and downs of a more aggressive fund, investing in more conservative mutual funds might give you more peace of mind.Step 4
Review the past performance of the available mutual funds. Although past performance is never a guarantee of a fund's future success, by reviewing a fund's record, you can see how it performed in different market climates. Check to see if the same management team is in place at the fund, as a new manager might give you dramatically different results.Step 5
Incorporate all fees and expenses into your decision-making process. Some funds have higher annual expenses than others, and over time, this can reduce your overall return substantially. Ask your plan administrator if there are costs or restrictions involved in switching your funds once you have made your initial choices.Step 6
Strike a balance between your long-term investment goals and your risk tolerance. Every investor wants to end up with the biggest possible nest egg in their retirement account, but high potential for reward often equates to high risk. Generally, your mix of investments, known as your asset allocation, should get less aggressive as you age. Choose funds that offer the greatest potential return while keeping the risk that you could lose your money as low as possible. Diversify your account by selecting funds that don't move in lockstep, and you can smooth out the ups and downs of your investments.Step 7
Keep your portfolio balanced. As some of your mutual funds outperform others, your original asset allocation will eventually get out of balance. Check your 403(b) plan at least annually, if not quarterly, to see if you need to make any adjustments to your account.
- Some 403(b) plans won't allow distributions until you retire or change jobs, and you'll always pay taxes on your withdrawals. You'll also face a 10 percent penalty if you take money out before age 59 1/2 (or age 55 if you retire).
John Csiszar has written thousands of articles on financial services based on his extensive experience in the industry. Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to his online work, he has published five educational books for young adults.