403b minnesota

December 5, 2023

403(b) Minnesota: A Guide to Investments, Tax, and Withdrawal Rules

Do you have a 403(b) in Minnesota? The 403(b) is your financial ally in the land of retirement savings. However, there are some complexities that come with having a 403(b). This is a general overview of the topic. But we recommend you seek the advice of a fiduciary financial advisor and a tax professional when doing your retirement planning and tax planning.

By Mike Rogers, AIF®, Founder and President of 360 Financial

Mike Rogers is a fiduciary financial advisor with over 30 years of experience in the financial services industry as an investment advisor and financial planner. He founded 360 Financial in 1995 and holds series 7 and 63 security registrations with LPL Financial.

403(b) Basics for Minnesotans

Think of your 403(b) as a cozy savings nest, specific to certain employees of public schools, tax-exempt organizations, and some ministers. A 403(b) plan allows you to tuck away money from your salary before taxes. This means you don’t pay Uncle Sam on that money… yet.

Now, think of your paycheck as a pie. 

By contributing to a 403(b), you’re essentially choosing to eat a slightly smaller piece of pie now to ensure you have pie slices waiting for you in your golden years. 

And who doesn’t like future pie? 

But there are some complexities to having a 403(b) in Minnesota and elsewhere in the US. In this post, we’ll cover 403(b) benefits, limitations, and rules so that you can manage your money wisely.

If you need help with your 403(b), please reach out to a fiduciary financial advisor who can guide you through the process of ensuring your investments are optimized. 

Table of Contents

  1. 403(b) Basics
  2. What is a 403(b)?
  3. What are the benefits of a 403(b) for Minnesotans?
  4. Minnesota 403(b) Limitations and Plans
  5. Tax Planning and Your 403(b) in Minnesota
  6. What to Do With Your 403(b) When You Retire
  7. 403(b) Example Case Study: Successful Rollover and Pitfall Avoidance
  8. Common Questions about 403(b) Plans in Minnesota
  9. Summary of Key Points

What is a 403(b)?

A 403(b) plan is a retirement savings tool available for certain employees, including those in public education, hospitals, colleges, school districts, and some non-profit organizations, and certain ministers. 

A 403(b) is similar to a 401(k) but tailored for specific sectors. When you contribute to a 403(b), you’re allocating a portion of your income into this plan before taxes are applied. This pre-tax contribution reduces your current taxable income, providing an immediate tax benefit.

Over time, the money in your 403(b) account grows tax-deferred. This means you won’t pay taxes on the earnings as they accrue. Taxes are only paid when you withdraw funds, typically during retirement. 

A 403(b) is an effective way to save for the future, as it not only allows you to grow your retirement savings but also provides potential tax advantages in the present. Understanding and using a 403(b) can be a key component in your overall retirement strategy.

What Are the Benefits of a 403(b) for Minnesotans?

Pre-tax Contributions

The first perk of a 403(b) for those living in the Land of 10,000 Lakes is the pre-tax contributions. By contributing to your 403(b), you’re reducing your taxable income for the year. Think of it as a financial magic trick: by saving for your future self, you’re lowering today’s tax bill. This can be especially beneficial in Minnesota, where state income tax rates are noteworthy.

Employer Matching

Next up is the potential for employer matching. Some employers will match your contributions to a certain percentage. This is essentially free money towards your retirement, boosting your savings without extra effort on your part. It’s like getting a bonus for being smart with your finances! 

Investment Choices

403(b) plans typically offer a range of investment options that cater to different risk tolerances and investment goals. This means you can tailor your retirement savings to suit your personal financial situation and future aspirations.

Long-term Savings Potential

Finally, the long-term savings potential of a 403(b) cannot be understated. Thanks to the power of compound interest, your savings can grow significantly over time. The earlier you start, the more you benefit from this compounding effect, making a 403(b) a smart move for those thinking ahead about their retirement years in Minnesota.

Minnesota 403(b) Limitations and Plans

Like any investment tool designed for retirement, the 403(b) does have some limitations that are important to consider. 

Limited Withdrawal Options

One of the limitations of a 403(b) plan in Minnesota, as with most retirement plans, is the restricted access to funds before retirement age. Early withdrawals can result in penalties and taxes, reducing the overall benefit of the plan. This is designed to encourage long-term saving, but it means you need to consider other options for liquidity in case of emergencies.

Most financial advisors and personal finance experts will recommend that you have a cash cushion or emergency fund to ensure that when you have unexpected expenses, you can easily cover those costs without dipping into your investments. The size of your cash cushion or emergency fund will depend on your lifestyle and family circumstances. But please keep this in mind when contributing to your 403(b).

Potential for Fees

Another point to consider is the potential for fees associated with 403(b) plans. These can include administrative fees, investment management fees, and sometimes, surrender charges if you decide to transfer funds. It’s important to understand the fee structure of your specific plan, as these fees can impact the overall growth of your retirement savings.

Investment Risks

Lastly, all investments carry some degree of risk, and the options within a 403(b) plan are no exception. The risk level depends on the types of investments you choose within your plan. While some options like government securities might be lower risk, others, such as stock-based mutual funds, can be more volatile. It’s crucial to balance your investment choices with your risk tolerance and retirement timeline, possibly consulting with a financial advisor to align your strategy with your long-term goals.

Specific Rules and Guidelines Pertaining to 403(b) in Minnesota

In Minnesota, the rules and guidelines for 403(b) plans are largely consistent with federal regulations, but there are some state-specific nuances. For instance, Minnesota public school districts often have specific rules about the vendors they use for their 403(b) plans. Additionally, state law mandates that public school employees be given the opportunity to participate in a 403(b) plan. It’s important for participants to be aware of the specific rules and guidelines set by their employer, as these can vary.

Employers in Minnesota who Commonly Offer 403(b) Plans

In Minnesota, 403(b) plans are predominantly offered by public education institutions, non-profit organizations, and certain religious institutions. This includes public schools, universities, charities, and certain hospitals. These employers often provide these plans as part of a comprehensive benefits package to attract and retain quality employees in these crucial sectors.

Who Is Eligible for a 403(b) Plan in Minnesota?

Eligibility for a 403(b) plan in Minnesota is generally determined by the type of employer. Employees of public schools, employees of certain tax-exempt organizations and certain ministers are eligible. Part-time and full-time employees may be eligible, but specific eligibility criteria, such as minimum hours worked or length of service, can vary by employer.

How Does a 403(b) Differ from a 401(k)?

While both 403(b) and 401(k) plans are tax-advantaged retirement savings plans, they cater to different types of employees. A 403(b) is primarily for employees of public schools, non-profits, and certain ministers, while a 401(k) is offered by private-sector employers. 

The investment options in a 403(b) are often more limited, typically focusing on annuities and mutual funds, whereas 401(k) plans often have a broader range of investment options. Additionally, the fee structures and employer matching contributions can vary significantly between the two types of plans.

Tax Planning and Your 403(b) in Minnesota

Federal Tax Planning

When it comes to federal tax planning with a 403(b), the primary advantage lies in its tax-deferred nature. Your contributions reduce your taxable income, potentially lowering your tax bracket. 

This tax break can be a significant benefit, especially if you expect to be in a lower tax bracket at retirement. However, it’s important to plan for the taxes you’ll owe upon withdrawal. Since distributions are taxed as ordinary income, understanding your future tax liability is crucial for effective long-term planning.

In other words, it’s important to work with a tax professional or financial advisor who can help ensure that you’re prepared for the taxes you’ll need to pay when withdrawing from your 403(b) in retirement. Tax planning is a critical part of retirement planning. 

State Tax Considerations for Minnesotans

In Minnesota, state tax considerations also play a role. The state follows federal guidelines in terms of tax-deferred status of contributions. However, Minnesota’s progressive tax rates mean that reducing your taxable income now could have more pronounced benefits. It’s wise to consider how your current tax rate compares to what you anticipate it will be at retirement, keeping in mind potential changes in state tax laws.

We recommend that you speak with your tax professional as well as a fiduciary financial advisor about your specific situation. 

Withdrawal Penalties and Rules

Regarding withdrawals, the rules for a 403(b) in Minnesota are aligned with federal standards. Withdrawals before age 59½ typically incur a 10% early withdrawal penalty, in addition to being taxed as income. 

Certain exceptions apply, such as disability or qualifying hardships, but these should be carefully considered. It’s also important to note that starting at age 72, you must take Required Minimum Distributions (RMDs), as dictated by the IRS. 

Planning for these withdrawals is a key part of managing your 403(b) effectively and avoiding unnecessary penalties.

What to Do With Your 403(b) When You Retire?

403(b) to IRA Rollovers

One of the options you have upon retiring is rolling over your 403(b) into an Individual Retirement Account (IRA). This move may offer several advantages. First, it potentially opens up a wider range of investment options compared to what’s typically available in a 403(b) plan. Additionally, IRAs often have more flexible withdrawal rules and can provide more estate planning benefits. However, it’s important to consider factors like the differing fee structures and protection from creditors offered by 403(b) plans and IRAs. Consulting with a fiduciary financial advisor is advisable to ensure this move aligns with your overall retirement strategy.

Benefits of 403(b) to IRA Rollover:

  • Wider range of investments
  • More flexible withdrawal rules
  • Greater estate planning benefits

Minnesota State Tax on 403(b) Retirement Withdrawals

In Minnesota, withdrawals from a 403(b) plan in retirement are subject to state income tax. Since these withdrawals are considered income, they’re taxed at Minnesota’s current income tax rates, which are progressive. 

Planning for these state income taxes is an essential part of your retirement strategy. It’s important to consider how these taxes will impact your retirement income, especially if you have other sources of income that could push you into a higher tax bracket. 

Proper tax planning can ensure you have the income you need in retirement and aren’t paying excessive taxes.

403(b) Example Case Study: Successful Rollover and Pitfall Avoidance

Let’s consider the case of Sarah, a retired school teacher from Minnesota.

After a fulfilling 30-year career, Sarah decides it’s time to retire. She has diligently contributed to her 403(b) plan throughout her career, accumulating a substantial nest egg. As she approaches retirement, Sarah faces the crucial decision of how to manage these funds.

Rollover Decision:

Sarah decides to roll over her 403(b) into an IRA. This decision is driven by her desire for more investment options and flexibility in withdrawals. The rollover process is straightforward, and she makes sure to execute a direct rollover to avoid any tax withholdings and penalties.

Pitfall Avoidance:

One potential pitfall Sarah avoids is acting hastily. She consults with a fiduciary financial advisor to understand the implications of the rollover, particularly regarding tax consequences. The advisor helps her understand that by rolling over to an IRA, she could better control her tax situation, especially with Minnesota’s progressive tax rates. The advisor walks her through all the possible options so that she can make an informed decision.

Since she seeks advice from a fiduciary, she knows that her advisor is legally bound work in her absolute best interest at all times. So she’s not worried about whether she’s getting good advice. She knows that she can trust her advisor. 


Post-rollover, Sarah has a diversified portfolio tailored to her risk tolerance and retirement goals. She is able to plan her withdrawals more strategically, taking into account her other income sources which include Social Security and a small rental property. Working with her advisor and accountant, she has a plan which allows her to minimize her tax liability.

Key Takeaway:

Sarah’s example highlights the importance of careful planning and seeking professional advice when dealing with 403(b) rollovers. By getting advice, planning ahead, and considering taxation and retirement goals, Sarah can make an informed decision that optimizes her retirement savings and minimizes potential pitfalls.

403(b) Options When Leaving an Employer

A plan participant leaving an employer typically has four options. If you have a 403(b) and you’re leaving an employer, you may engage in a combination of these options. Each choice has advantages and disadvantages which you should discuss with your financial advisor and financial planner.

Any of these options might be right for you. So we strongly recommend that you speak with a financial advisor to get advice on what will be best for you based the particulars of your situation.

4 Main Options for Plan Participants Leaving an Employer:

• Leave the money in your former employer’s plan, if permitted.

• Roll over the assets to your new employer’s plan, if one is available and rollovers are permitted.

• Do a rollover to an IRA.

• Cash out the account value.

Common Questions about 403(b) Plans in Minnesota

What are the disadvantages of a 403(b)?

403(b) plans often have limited investment options and can come with higher fees. Early withdrawal penalties and restrictive access to funds before retirement age are also something to consider.

Can you do a 403(b) and a state of Minnesota retirement?

Yes, you can participate in both a 403(b) and a Minnesota state retirement plan, which can enhance your overall retirement savings strategy.

How can I find out if my employer matches my 403(b) in Minnesota?

Check with your HR department or plan administrator. Employer contribution details are outlined in your plan’s summary description.

What is Minnesota state tax on 403(b) retirement withdrawals?

In Minnesota, 403(b) withdrawals are taxed as income at the state’s current income tax rates, which are progressive.

What are Minnesota 403(b) investment limitations?

Investment choices in 403(b) plans are often limited to mutual funds and annuities, with fewer options compared to other retirement accounts like 401(k)s or IRAs.

How much should I contribute to my 403(b)?

Aim to contribute enough to get any employer match, then consider your retirement goals, current financial situation, and tax implications to decide your optimal contribution level.

Summary of Key Points

  • 403(b) plans are for public education, non-profit employees, offering pre-tax contributions and tax-deferred growth.
  • Benefits include pre-tax contributions, employer matching, diverse investments, and long-term savings potential.
  • Limitations include restricted withdrawals, potential fees, and investment risks.
  • Specific eligibility and rules apply in Minnesota, mainly for public sector and non-profit employees.
  • Contributions reduce taxable income, affecting federal and state taxes; withdrawals are taxed as income.
  • Retirement options include 403(b) to IRA rollovers; understanding state tax implications and investment limits is crucial.

Connect with a Fiduciary Financial Advisor


If you need a wealth management team to help you achieve your big-picture goals, we recommend scheduling a call with a financial advisor at 360 Financial.

360 Financial is one of Minnesota’s best independent wealth management firms. We work with clients in Minnesota and across the US. If you’d like to work with a team that always puts your best interests first and is committed to helping you create a lasting legacy, please get in touch. 

Schedule a 15-minute Call

About the Author

Mike Rogers

Mike Rogers

Mike Rogers is the founder and president of Minnesota-based financial advisory firm 360 Financial. As the founder, Mike’s priority is that 360 Financial always serves the clients with empathy, integrity, and honesty. This customized, client-centric approach allows the firm to help clients decipher between the things they can control and what truly matters.

In other words, Mike understands that money is not the end-all-be-all; instead, it’s the “how” that fuels the “why” to the question: “What’s important to you?”

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How to Tell if a Financial Advisor Is a Fiduciary

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This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.


Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 Ł may result in a 10% IRS penalty tax in addition to current income tax.

A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 Ł or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.


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