403(b) Plan

RECENT NEWS
Motley Fool  Jun 21  Comment 
Ever wondered what the difference is between 403(b) vs. 401(k) plans? Read on.
DailyFinance  Jun 3  Comment 
Non-profit organizations that sponsor 403(b) plans are simplifying investment platforms by streamlining the options available for investors. According to the sixth annual Plan Sponsor Council of America's (PSCA) 2014 ...
DailyFinance  Jan 28  Comment 
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Investing School  Oct 31  Comment 
A designated Roth account is an IRA into which employees can opt to put a portion, or all, of their contributions. This account is a separate account held within their 401(k) or 403(b) plans. All accounting is done separately from that conducted...
Wall Street Journal  Jan 8  Comment 
These retirement programs are becoming more like corporate 401(k) plans as school districts respond to revised rules.
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MarketWatch  Sep 16  Comment 
A MarketWatch report that originally published on Sept. 9 incorrectly identified the maximum dollar amount that an employee can contribute to a 401(k) or 403(b) plan. See the corrected story.
TheStreet.com  Dec 4  Comment 
The government is establishing new rules for nonprofit companies' retirement plans, creating opportunities for fund managers.
HelpWithDebtNow.com  Apr 29  Comment 
403B Retirement Plan Although almost everyone has heard of the typical 401K retirement plan, fewer are aware of the Federal 403B retirement plan. The 403B plan offers some great potential, and should be invested in if the money can be at all...




 
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A 403(b) is a retirement plan available to employees of educational institutions, civil government and certain non-profit organizations. Many of the benefits and characteristics afforded by a 403(b) are similar to those offered by the 401k, which covers private-sector employees. The 403(b) plan allow participants to set aside money for retirement on a pre-tax basis, and it is allowed to grow tax deferred. The tax is applied when a withdrawal is made from the 403(b).

Like most other retirement tax-shelters an early withdrawal from a 403(b) carry a penalty of 10% (in addition to income taxes. Penalty free withdrawals can be made under the following cases:

  • The person reaches the age of 59½.
  • Retires from service at the age of 55.
  • Employees who retire early (before age 55), but want access to their 403(b) without penalty can do so using SEPP. This provision requires that the person withdrawals "equally" for a period of five years, or till he/she reaches the age of 59.5, whichever is longer. For example: if he retire at age of 49, he has to make equal withdrawals every year till he reaches the age of 59½. The provision works to prevent temporary withdrawals.
  • If the employee becomes disabled.
  • By borrowing directly from the 403(b). However, the amount has to be paid back with interest.
  • Death of the employee.

Benefits of a 403(b) plan

  • Money contributed into these plans are "pre-tax dollars," which means, taxes are not paid on these deposits until the money is withdrawn from the retirement plan.
  • Individuals can defer up to $15,500 for the year 2008 and $16,500 for 2009. Individuals above 50 can contribute an additional $5,000 in 2008 and $5,500 in 2009. Any contribution to a 401(k) reduces this limit. For example: if an employee (under 50) puts in $10,000 in a 401(k) plan in a year, he can only put in $5,500 in a 403(b) during that year.
  • Some employers will make matching contributions to a 403(b), especially if it is their only retirement planning option. This is essentially the same as matching contributions to a 401(k). For example a 5% match means that the employer will match contributions up to 5% of the employees annual salary. In other words, if someone earns $50,000, and contributes $4000 to his/her 401(k), the employer will contribute a maximum of $2500 (5% of salary). In some cases, the match is not dollar-for-dollar and employers may only match 50%, or 25% of the employee's own contribution.
  • An employee can borrow money from a 403(b) plan. But this has to be paid back with interest.
  • Deferring taxes allows a person who is will be in a lower tax bracket during retirement, than while he is saving up for retirement, to benefit from a lower tax rate.

Disadvantages of a 403(b) plan

  • Withdrawals from any retirement plan: 401k, 403b, 457 plan or IRA 's are income taxable when the money is withdrawn. If the person is below the age of fifty nine and a half years (except hardship cases and other special situations) there is an "IRS Early withdrawal 10% penalty" in addition to deferred taxes.
    • Exceptions include: the death of the employee, total and permanent disability, separation from service in or after the year the employee reached age 55, a qualified domestic relations order, and deductible medical expenses, exceeding the 7.5% floor.
  • Starting at the age of 70½, employees must to take minimum distributions, i.e. they are required to withdraw, from the 403(b) plans.
  • Investing in annuities have costs of their own. Typically, if an investor wants to get out of an annuity investment, he or she will have to pay a surrender charge -- in some cases, this charge can be as high as 8 percent of the investment.
  • Since 403(b)s are not directly administered by the employer, money in these plans can remain their even if the employee switches from one employer to the other.

403(b) vs. IRA

  • The maximum limit for 403(b) plans are substantially higher than the limit for IRA. In 2008, individuals under 50 were allowed to contribute $15,500 to 403(b) plans, whereas they can only contribute $5,000 to an IRA.
  • An individual can borrow money from the 403(b) without paying a penalty, but not from an IRA. The borrowed money from a 403(b) is not treated as an income but has to be paid back with interest.
  • Some mutual funds forego load fee for 403(b) accounts.
  • IRAs offer lot more flexibility in terms of investments. Not only does an investor have more options through an IRA, he can also change his investments positions much more easily (and frequently) in an IRA account than in a 403(b).

How to start a 403(b) plan

Unlike 401(k)s, these plans are not offered directly by the employer. An employer will have a list of investing companies (vendors) offering these plans for the institution. An employee can open a 403(b) with any of these vendors. Once an account is opened, the employer will deduct monthly contributions from the paycheck and wire it to the investment company.

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