403(b) Plans

A 403b plan is a tax-sheltered annuity retirement plan offered by tax-exempt organizations. The most common participants of 403b plans are teachers. However, any 501(c) 3 organization is normally eligible.

Here are some bullet points that you may find to be helpful.

1) Contributions are not tax-deductible, per se, but given that contributions reduce a participant's taxable income they can, and usually do, reduce an employee's total tax bill.

2) Investment earnings inside 403b's are also tax deferred. This means that the growth, gains, dividends, and interest earned on the funds will not be taxed until withdrawn from the account.

3) Generally, three types of contributions may be made to 403b plans.

• Employee pre-tax contributions. These are contributions described in bullet 1 above. They reduce taxable income and are therefore called "pre-tax"
• Employee after-tax contributions. These are contributions that do not reduce the participant's taxable income. Sometimes referred to as 403b Roth contributions, account-owners have the benefit of tax-free withdrawals, usually at retirement.
• Employer contributions. These may be matching, mandatory, or optional contributions made by the employer to the employee's account.

4) 2011 maximum 403b contributions are limited to the lesser of:

• 100% of the employee's compensation, or
• $16,500 (As of October 20, 2011 the IRS increased the limit to $17,000 for 2012 contributions. If you are age 50 or over, you may make 2011 annual contributions up to $22,000.  Leaving the 2012 catch-up the same, then the total contribution for 2012 403b participants is now $22,500.

5) Participants do not have to defer money into the plan. Also, participants may make investment changes to the 403b account as per the employer's plan terms.

6) Employers are not required to make contributions to an employee's account. They may make matching, mandatory, or optional contributions at the employer's discretion.

7) A retired or terminated employee MAY make contributions to a plan even though they are not actually still working. Any regular wages or unused vacation or sick days may be eligible by the later of:

• 2½ months from the date of severance, or
• The end of the year of the employee's severance.

8) Generally, 403b funds will be held inside of annuity contracts with insurance companies or in mutual funds with a mutual fund company.  Funds will not be held by the employer.

9) A participant may make 403b withdrawals from 403b plans in the following circumstances if the plan allows:

• Attaining the age of 59½ or older.
• Severance of employment.
• Disablement.
• Death.
• Financial hardship.

10) A 403b early distribution penalty of 10% is generally assessed on hardship distributions and unpaid loans. In addition to the 10% penalty, 403b hardship withdrawals will be subject to ordinary income tax on the following year's return.

11) 403b plan loans are generally allowed. Typically, a participant may only borrow the greater of $10,000 or 50% of the plan balance. The balance generally has to be repaid within 5 years and will be subject to a 10% penalty if left unpaid.

12) The participant's funds are generally portable. The funds can be rolled into another 403b plan or 401k plan. Funds may also be rolled over into a traditional IRA. The participant may leave the funds in the current plan or take a distribution. If the participant decides to take a distribution, the distribution amount will generally be subject to penalties and taxes if the account-owner is under the age of 59½.

13) Benefits are generally paid in the form of periodic (monthly usually) payments for full distributions. All distributions are taxed at ordinary income tax rates. Ordinary income tax rates are dependent on the participant's income tax position.

14) Be careful and thorough about naming beneficiaries. The named 403b beneficiaries will trump any named beneficiaries identified in wills or trusts.

15) A Roth 403b allows for "after-tax" contributions into the plan. This means that the money that is deferred into the Roth 403b retirement plan has been taxed. Withdrawals at retirement, including principle and growth, generally are distributed to the participant tax-free.

 

403b plans can be a real boon for employees of non-profit organizations when managed correctly.  Let 401kFundAdvice be your 403b investment advisor.