What is a 403(b) Retirement plan? A 403(b), also known as a tax deferred annuity or TDA, is a tax deferred retirement plan available to employees of public schools, tax-exempt organizations, employees of public schools which are organized by Indian Tribal governments, civilian faculty and staff of the Uninformed Services University of Health Sciences, and some ministers. It is very similar to the 401k as far as tax treatment is concerned. Pre-tax dollars are put into the 403k(b) and allowed to grow tax-free until retirement age when distributions are taken.
403(b) accounts can be created by the employer in one of the following three methods:
1) As a retirement income account in which either annuities or mutual funds can be invested.
2) As an annuity contract provided by an insurance company
3) A custodial account which only invests in mutual funds.
Why should I Invest in a 403(b) plan? As we mentioned above, a 403(b) plan contribution is tax free and grows that way until distribution at retirement. Earnings are fax free as well until retirement. However, if you contribute in a 403(b) via a Roth IRA contribution program, up front tax benefits are not available; however, you will not pay taxes on distributions at retirment.
How do I contribute to a 403(b) plan? Contributions to a 403(b) can be made in the following ways:
1) Elective Deferrals - elective deferals allow the employer to withhold money from you paycheck and contribute this directly into your 403(b) account. This contribution will be tax-free.
2) Nonelective contributions - this includes all employer contributions which can be required or discretionary.
3) After-tax contributions - This refers to NON-Roth contributions that are made with after tax income. Some plans will allow this method of contribution, check with your plan sponsor. Remember, you cannot deduct this form of contribution on your tax return.
4) A combination of all of the above.
How much can I contribute to my 403(b) plan? Employers may contribute to the 403(b) account in an amount that equals the total aggregate compensation that is awarded to their employees. However, no single employee can receive more than $44,000 OR over 100% of their income.
When can I withdraw funds from my 403(b)? Similar to the 401k, an employee may begin taking distributions from the tax deferred annuity at age 59.5 or the retirement age as defined by the plan.
Additionally, if the employee becomes disabled, distributions are allowed. In the event of death, the beneficiaries of the plan are allowed to withdraw the money.
In some cases, the employer will terminate the 403b and replace it with another retirement plan. In this case, the employee can start taking distributions. Finally, if the employee is laid off from the company, he/she may start taking distributions.
Any distribution that violates the terms of distribution that are set forth by the IRS or the plan itself are subject to a 10% penalty on top of all applicable taxes for withdrawing.
