403b Retirement Plans

What are 403(b) plans?

 

A 403(b) retirement plan is quite similar to a 401(k) plan. It is offered by non-profit organizations, like universities and charitable organizations. Your employer can determine the financial institutions where you can maintain your 403(b) accounts. Accounts under a 403(b) plan can be one of the three following types:

An

annuity contract

which is provided through an insurance company is known as tax-sheltered annuities (TSAs) and also tax-deferred annuities (TDAs).

A custodial account provided by a retirement account custodian. Investments here are limited to regulated investment companies, like mutual funds. A retirement income account, for which investments options are either annuities or mutual funds.

 

What are the benefits of a 403(b) account?

 

You can enjoy reduced taxable income through pre-tax contributions and tax-deferred earnings on plan contributions. You will probably have to pay less tax on assets as the distributions usually happen after you retire and are in a lower tax bracket. An additional advantage is that you can also take loans from the 403(b) accounts.

 

What are the types of contributions?

  • Elective-deferral contributions - Those deducted from employee's paychecks on a pretax basis.
  • Employer contributions that can be fixed or discretionary .
  • After-tax contributions which are deducted from employee paychecks on an after-tax basis .
  • A combination of any of the three contribution types .


Who can establish a 403(b) plan?



403(b) Retirement Plans can be established by any of the following organizations: A tax-exempt organization established under section 501(c)(3) of the Internal Revenue Code. These organizations are usually referred to as section 501(c)(3) organizations.

  • Public school systems
  • Cooperative hospital service organizations
  • Uniformed Services University of the Health Sciences (USUHS)
  • Public school systems organized by Native American tribal governments
  • Certain ministers

An organization may qualify for exemption from federal income tax if it is run and managed exclusively for one or more of these purposes - "charity, religion, education, science, literacy, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals". The organization must be a corporation, community chest, fund or foundation.
If your employer is one of the types of organizations listed above, you can participate in a 403(b) plan maintained by your organization.

What are the other significant features?

Most of the 403b retirement plans enable you to take distributions when you reach the retirement age. But, there are many 403(b) plans that allow earlier payments under certain circumstances. For example, a 403(b) plan can allow you to receive payment benefits after terminating the employment, even if that happens before you reach the retirement age.

Your compensation is based on W-2 wages and your compensation in excess of $220,000 may not be considered for making a 403(b) contribution. And more importantly, if the money is distributed before you are 59.5, it will be subject to a 10% early-distribution penalty unless you qualify for an exception. So, instead of relying only on

Social Security benefits

or investing in stocks, you can also consider investing in 401(k)/403(b) plans. Your employer-sponsored retirement savings plans, company pensions and personal savings together can build up a generous retirement income for your future years.