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The Benefits of a 403(b)

A 403(b) is a retirement savings plan, or tax shelter, for employees of tax exempt organizations. This includes public school systems, non-profit organizations, and employees of cooperative hospital services. You can generalize by saying the 403b is the nonprofit organization's equivalent of the 401k.

403(b) is sometimes referred to as a TSA or Tax Shelter Annuity plan. 403b plans are retirement plans, invested Pre Tax payroll deduction and Tax Deferred basis!

403(b) is available to certain employees of public schools and Tax-Exempt organizations. The 403b account can be any one of the following types, or combinations of these types:


Benefits of a 403b
Besides the obvious benefit of a self funding retirement account, there are three additional benefits associated with 403b plans:

• Contributions to your 403b account are made Pre Tax on a tax-deductible basis.

• Earnings on your contributions are allowed to grow on a tax-deferred basis.

• You may be able to take a tax credit for elective deferrals made to your account.

403b Eligibility
Generally, you are eligible to participate in a 403b plan if you work for a not-for-profit organization. This type of organization is sometimes referred to as a 501(c)(3) organization, referencing the section of the Internal Revenue Service Code that defines this type of organization.

Not-for-profit organizations include employees of public schools, employees of cooperative hospitals, faculty and staff of the Uniformed Services University of the Health Sciences, and certain ministers.

Just because you work for one of these types of public companies, does not mean you can automatically have access to a 403b account. Only employers are allowed to establish 403b plans.

Contributing to a 403b Account
The rules for contributing to a 403b account are very similar to those of a 401k plan. You cannot contribute to your 403b account directly; instead your money is invested by your company via deductions from your paycheck. Your company can also make matching contributions, or discretionary contributions, to your account.

In short, you can contribute to a 403b in three different ways - or any combination of these three ways:

• Elective Deferrals - these are tax-deferred contributions to your account using money withheld from your paycheck.

• Non-Elective Contributions - these are employer contributions, which may be in the form of matching contributions, mandatory, or discretionary contributions.

Contribution Limits
There are limits to the amount you can contribute to a 403b plan. If you exceed these limits, then a tax penalty may apply. Generally, your 403b plan administrator can help you figure out how much you can contribute without incurring a penalty. In most situations, the plan administrator will automatically stop contributions to help you avoid a penalty.

Total Contributions
The limit in 2010 for annual additions to a 403b was the smaller of $49,000 or 100% of your includable compensation. In 2011, this limit remains the same at $49,000. In the years 2012 and beyond, this limit will be indexed for inflation and can move up in $1,000 increments.

Elective Deferrals
The limit on elective deferrals to your 403b was $16,500 in 2010. In 2011, this contribution limit remains the same at $16,500. In the years 2012 and beyond, this limit can move up in $500 increments based on a measure of inflation.

Catch-Up Contributions
Finally, if you reach the age of 50 or older by the end of any calendar year, you may be eligible to make additional catch-up contributions to your 403b account. The maximum catch-up contribution you can make in 2010 is $5,500 or your includable compensation minus your other elective deferrals for the year. In 2011, the catch-up contribution remains at $5,500.

If you'd like to gain a better understanding of all the contribution rules including a discussion of the 15-Year Rule, and Maximum Allowable Contributions, then take a look at our publication on 403b contributions.

403b Contributions and Income Taxes
If your plan allows you to make an after-tax contribution, then you cannot deduct these contributions on your federal income tax return. Since your employer makes the contributions to your 403b plan on your behalf, these elective deferrals will be shown on Form W2 in Box 12. The W2 box for retirement plan will also be checked.

403b Rollovers
You can rollover a 403b account into several different types of retirement plans. This includes traditional IRAs, 401k plans, SEP IRA, and even a Roth IRA (although you may be required to include some amounts in taxable income). You cannot rollover a 403b plan into a SIMPLE IRA.

There are two ways to perform a 403b rollover:

• Distributions to Individuals - in this situation the money from your 403b plan is distributed directly to you, and you have to abide by the 60-day rule and rollover 100% of the distribution; including 20% that is withheld with a direct distribution, or you'll face some tax penalties.

• Direct Rollovers of 403b Plans - you also have the option of having your 403b plan administrator make the rollover directly to an IRA or your new 403b plan. This is by far the easiest way to conduct a rollover because the 20% withholding rule does not apply to direct rollovers. All you need to do is coordinate the exchange of the distribution between the two financial institutions.

Generally, a 403b rollover needs to be completed by the 60th day following the day you've received any distribution. There are also some rollover rules that deal with situations like frozen deposits and hardship withdrawals. To find out more information on those topics, take a look at our publication on 403b rollovers.

403b Distributions
In general, you can take a distribution from your 403b account once you've satisfied one of the following requirements:

• You've reach age 59 1/2

• You've become disabled

• You've passed away

• Your employment has been severed

• You experience a financial hardship (applies to salary reduction contributions)

If you plan to take an early distribution, then you should also plan to pay state and federal income taxes due on that distribution. Early distributions may also be subject to an additional 10% tax penalty.

Minimum Required Distributions
One of the big benefits of Roth IRAs is that there are no minimum required distributions, but that's not the case with 403b plans. You're going to need help from your plan administrator if you started your plan before 1986. But generally, you must take a certain amount, or possibly all, of your interest accruing in your 403b account by April 1st of the calendar year in which you become age 70 1/2 or the year you retire, whichever is later.

Once again, the tax penalties can be pretty big if you don't take the minimum required distribution from your 403b. To find out more on this topic, take a look at our article on 403b Distributions and Transfers.

_______________________________________________________________________

Moti Gur is a Registered Representative with and securities offered through Financial Network Investment Corp and Cetera Adviser Networks LLC.
A registered broker/dealer, Investment advisor and member FINRA/ SIPC
3807 Wilshire Blvd, Suite 1040 Los Angeles, CA 90010 213-385-6237
http://www.financialnetwork.com

 

 

   
   
 
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