Retirement Q&A's

 What is a 403(b)?

A 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program. Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. The vast majority of participants are teachers in public schools, colleges and universities.

Contributions to a TSA are made for the participating employee by his or her employer. The money that is contributed to the TSA comes either from employer contributions – which are called non-elective deferrals, or from employee contributions, called elective deferrals.

Elective deferrals are deducted from the participant’s paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement, giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most 403(b) TSA contributions are elective deferrals, meaning that the participating employee supplies the money to make the contributions.

What are the Advantages of Participating in a 403(b)?

Congress recognized the importance to our society of certain professions, including teaching, and the important role played by nonprofit organizations. Therefore, a tax break was granted in the form of a special retirement plan – a 403(b) plan.

The employer must sponsor a 403(b) plan, but installing and maintaining a typical TSA program is relatively simple and straightforward compared to other types of retirement plans. As the name Tax-Sheltered Annuity implies, contributions made on your behalf are not currently taxed, with income tax deferred until the premium and interest earned are withdrawn at retirement.

To illustrate the tax advantage of a 403(b) plan, suppose you are a teacher earning $35,000 this year. If you elect to put $5,000 in a TSA through a salary reduction agreement, you will pay income tax on only $30,000, with the tax on the $5,000 contribution deferred until you withdraw the money at retirement. Both your contributions and the interest earned are tax-deferred until retirement, compounding the powerful tax advantage of a TSA.

Why Should I Participate in a 403(b)?

While most state teacher retirement plans provide liberal retirement benefits, chances are your teacher retirement plan or other employer sponsored retirement program will not provide enough income after retirement to enable you to maintain your standard of living. A 403(b) permits you to accumulate money on a highly tax favored basis, to supplement teacher retirement or another retirement plan.

The powerful tax break granted by Congress, combined with the power of compound interest (the time value of money), permits large sums of money to be accumulated over a period of years. An intelligently planned and funded 403(b), together with teacher retirement, can make the difference between a comfortable retirement and the unhappy alternative.

How Much May I Contribute to My 403(b)?

The Maximum Exclusion Allowance calculation was repealed effective January 1, 2002. You can  contribute 100% of your compensation subject to the elective deferral limit of $16,500 for 2009, which is hte same for 401(k) as well.

For individuals age 50+, an additional $5,500 can be contributed for 2009, making the deferral limit $22,000.

If a 403(b) participant has 15 or more years of service, they may be eligible for an additional "catch-up" provision if allowed for in the employer's plan documnet. 

 What is a 457?

The law allows public school districts and other governmental employers to sponsor voluntary savings plans for their employees under Section 457 of the Internal Revenue Code. These plans are technically "non-qualified deferred-compensation plans." However, Congress has effectively given them the same characteristics as qualified retirement plans, such as 401(k) plans, through a series of changes in federal laws made from 1996 through 2001.

A 457 plan is sponsored by the local employer and in some ways works like a 401(k) plan. The employer can pick the vendors offering investments in the plan and remove them if they do not do a good job. The employer can set all of the other rules. Federal laws make compliance for such plans much easier than for 401(k) plans since there are no "non-discrimination tests" to perform.

Beginning January 1, 2002 federal law allows an employee to defer up to the lesser of 100% of compensation or $16,500 to a 457 plan on a tax-deferred basis. For individuals age 50 or older, the dollar limit goes up to $22,000. This limit is in addition to the limit for any other plan. Thus, an employee can defer $16,500 under a 457 plan and also defer the same maximum amount to a 403(b) or other salary deferral plan. There is also a "Catch-up" provision that if the employee is in their last three years of employment they may contribute up to a maximum of $22,000 per year. There are restrictions on this provision, so please consult with your tax advisor.

May I Borrow Against the Money in My 403(b)for Emergencies?

Yes, if allowed for in the employer's plan documnet. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) makes it possible for you to borrow from your TSA. Most fixed dollar TSA contracts have a loan feature, as do some variable annuities. Loan provisions vary from company to company.

The law permits you to borrow 100% of the withdrawal value of your TSA, if the loan does not exceed $10,000. If the amount borrowed exceeds $10,000, the maximum loan is 50% of the withdrawal value of your TSA not to exceed $50,000.

By law, the loan must be repaid in at least quarterly installments of principal and interest over a period not to exceed five years, with one exception: if the purpose of the loan is to acquire a dwelling intended to be your principal residence within a reasonable time, the repayment period may be extended beyond five years with the agreement of the TSA company.

When making a loan, first check to see what interest rate the company will charge you on the borrowed amount. Then, find out what interest rate will be credited on the accumulation value in your account set aside as collateral for the loan. You should take these things into consideration in deciding whether a TEFRA loan is better for your circumstances than borrowing from a bank or credit union.

When May I Withdraw Money in My 403(b)?

Under current law, you may begin withdrawals at any time once you have attained age 59½, and you are required by law to begin making withdrawals once you are 70½. There are important exceptions to the general rules.

If you separate from service with your employer prior to age 59½, but on or after age 55, the law permits you to withdraw money from your TSA with no IRS tax penalties or restrictions. If you separate from service prior to age 55, you are permitted restricted access to your money, but you must stretch out the distribution in a way that would systematically liquidate your account over your life expectancy. In other words, the amount you can withdraw each year is restricted. The good news is, once you have attained age 59½ and if you have made systematic withdrawals for at least five years, current law permits you to revoke the previous withdrawal election and have full access to your money.

When you reach age 70½, if you have not already started withdrawing money from your 403(b), you must generally begin doing so at that time. There are exceptions. If you are still working for an eligible employer, you may defer making any withdrawals until you actually retire.

If you die before you have begun making any withdrawals from your 403(b),  your surviving spouse (if any) may become successor owner of your 403(b). He or she will have the same rights as you had, except that no further contributions may be made. If your beneficiary is someone other than your spouse, he or she may take all the money at once or may stretch out the distribution over a period of years.

The distribution rules are complicated and it is important to comply with them to avoid tax penalties. Your 403(b) company or agent can provide you with the information you will need. There is a reason for the withdrawal restrictions on your 403(b). When Congress enacted the law creating 403(b) plans, it intended for you to use your TSA as a retirement savings vehicle, not as a short term tax-sheltered savings account.