Retirement investing for teachers can be confusing. In addition to pensions, teachers can have access to 403b and 457 plans. There are also considerations related to Social Security. Teachers in California have access to CalSTRS.
It’s no wonder many teachers are scratching their heads. With many private sector jobs, the retirement options are fairly straight forward. If you’re lucky, you have access to a 401(k). If the private sector employee is even luckier, they might get profit sharing or a pension. However, private pensions are quickly becoming a thing of the past for private sector employees.
403b plans were first introduced roughly 50 years ago. They are sometimes called Tax Sheltered Annuities or TSAs. Long ago, annuities were the only investment option. A lot has changed since then, but 403b plans are still often referred to as TSAs.
What teachers must know about their 403b:
Are you investing in an annuity or a mutual fund?
This can be hard to answer for some because it isn’t always clear. Annuities are contracts issued by insurance companies. They often allow investments in mutual funds via “sub-accounts.”
One big difference between annuities and mutual funds is cost. Annuities generally have a higher cost than mutual funds. There are surrender fees and mortality expense fees in addition to the cost of the mutual funds. These fees can be very costly and significantly reduce your returns over time.
Many teachers still invest in higher cost annuities. However, it’s not because they are the best option. Instead, it’s because they aren’t aware of alternatives that may be a better fit and less expensive.
A likely reason so many teachers invest in annuities is because “plan participants don’t fully understand the options available to them.” This is according to the California Teachers Association investment site ctainvest.org.
Are Roth contributions allowed?
Roth contributions are made with after-tax dollars. As a result, these funds can be used tax-free in retirement. Traditional contributions are pre-tax. Traditional contributions reduce your taxable income but become taxable in retirement. Understanding the differences in how retirement accounts are taxed is crucial.
You should consider whether you have many years to go before retirement. If so, it may be beneficial to consider funding a 403b via Roth contributions. These contributions will be tax-free in retirement.
It would be easy if we knew what our future tax bracket would be in retirement. However, this can be very difficult to predict. Future tax rates are not something we can control. There is always a possibility of tax rates going up. Therefore, it might be prudent to set aside some funds that will be tax-free, just in case.
Who contributes to your 403b plan?
Accounts are funded with contributions directly from your salary. They can be pre-tax (traditional) or after-tax (Roth). In either case, you are reducing your income to set aside funds for retirement. In 2025, those under age 50 can contribute $23,500 per year. Those who are age 50 or better can contribute an additional $7,500 known as a “catch-up.” These amounts apply whether you make a traditional or Roth contribution to your 403b.
SPECIAL NOTE: Beginning in 2025 there is a higher catch-up contribution limit for employees age 60 through 63. Employees who participate in 401(k), 403(b), and 457 plans in that age range can contribute an additional $11,250.
In some cases, the employer will make contributions as well. This is a huge benefit and should not be ignored. Be sure to find out if your employer contributes to your plan. You never want to leave money on the table.
What happens to my 403b if I change jobs or leave my employer?
Typically, if you separate from service from your employer, you can do a 403b rollover. Rollovers simply refer to the process of moving the money into another plan without being taxed. You can rollover to another employer’s retirement plan if it accepts rollovers. You can also do a rollover to your own Individual Retirement Account or IRA.
Before you decide to rollover your 403b, make sure you check if there will be additional costs and fees. If you were sold an annuity, you may be subject to surrender charges. These charges can occur if you move your funds away from the insurance company within a certain time frame.
You also want to make sure you understand exactly what type of financial product you are rolling your money into. Be careful to avoid investments with high costs and fees.
Is my advisor putting my interests first?
This is a very hot topic right now. The Department of Labor finalized regulations that went into effect in 2017. These rules require retirement plan advisors to put the interests of investors first.
This means advisors must disclose their fees, compensation, and conflicts of interest to their clients. You might be asking yourself, “you mean this isn’t the law already?“
For those advisors, myself included, who act as fiduciaries the answer is yes. We have always been required to put our clients interest ahead of our own. However, there are many financial professionals (probably a majority) who have never been held to the higher standards of a fiduciary. If you were sold an annuity or other commission based product, it is quite possible your interests weren’t put first.
Ask questions about how the advisor will be paid. Are they compensated by fees or commissions. Be direct. Ask them how much they will make if you follow their advice. Find out if they receive bonuses or other incentives for recommending certain investments. Ask them about fees compared to other investment options. Ask them who regulates their activities.
Other FAQs about 403(b) plans
A 403(b) and a 457 are both retirement plans available to many teachers, but they have different withdrawal rules and contribution opportunities. A 403(b) is similar to a 401(k) and is funded through payroll deductions. A 457 plan allows additional contributions and may allow penalty-free withdrawals if you separate from service. Many teachers can contribute to both plans, which can significantly increase retirement savings.
Your 403(b) provider should disclose whether your account is an annuity contract or a mutual-fund-based product. Annuities are issued by insurance companies and often include “sub-accounts” that mimic mutual funds but come with extra fees such as mortality and expense charges. If your statement or contract includes terms like “surrender charges,” “M&E fees,” or “annuity contract,” you are likely in an annuity.
Many teachers invest in annuities because plan information can be confusing and salespeople often promote them aggressively. According to the California Teachers Association, participants often don’t fully understand their available investment options. As a result, teachers may choose higher-cost products without realizing lower-cost mutual funds are available.
If you leave your employer, you can usually roll over your 403(b) into another employer’s plan or an IRA without taxes or penalties. Before moving your account, check for surrender charges, especially if you were sold an annuity. Also verify that the new account has lower fees and investment options that match your goals.
A rollover may reduce fees and simplify investments, but timing matters. Many annuities impose surrender charges if you move funds out too soon. Always check your contract’s surrender schedule and compare the fees, investment choices, and benefits of the new plan or IRA before making a decision.
This article should be considered a starting point for those taking a closer look at their 403b plans. What might be a good fit for one person may not work for another. There is never a one size fits all. However, getting up to speed on your retirement options will make you an informed investor and lead to better financial decisions.
Have you considered how a Certified Financial Planner™ can help you?
Hi Sir, I am Albert & I have a question about monies I have in two 403b mutual fund accounts and in my CALSTRS Defined Benefit account.
I will be retiring next month. Would you recommend that I leave these funds where they are, move all into another more accessible IRA or a like fund, or place them into one of my current holdings? (Vanguard or fbc retirement- empower retirement (Great West Life and Annuity)
Hi Albert, Thank you so much for your question and congratulations on your upcoming retirement! I know this response might be frustrating but I can’t provide a complete answer to your question. Simply put, I would need much more information about you and your situation to advise you on this. If you are interested in scheduling some financial planning or consulting time with me, let me know and I would be happy to take you on as a client.
Thanks for your time & the info.