403(B) RETIREMENT PLANS

403(B) Retirement plans

What is a 403(b)?

A 403(b) plan is a retirement savings plan,sponsored by a tax-exempt organization or public school, that offers significant tax benefits while helping you plan for the future. You contribute to the plan via payroll deduction, which can make it easier for you to save for retirement.

 What can I contribute?

The maximum contribution limits to a 403(b) account for a given tax year are modified for inflation periodically, and are subject to the following limitations:

• General Contribution Limit: Contributions on behalf of a participant must not exceed the limits set forth in the IRS Code (section 402(g)(1)).
• Elective Deferrals: The total of all elective deferrals made during the participant’s tax year, including those to other plans, must also adhere to the limits specified in the IRS Code.
• Age 50+ Catch-Up Contributions: Additional contributions may be allowed for participants aged 50 and older, subject to specific catch-up provisions.
• Special Section 403(b) Catch-Up Provisions: Certain participants may qualify for additional catch-up contributions based on their service.

It is essential for participants to determine their maximum annual elective deferrals while ensuring compliance with all applicable regulations.

Elective salary deferrals can be placed in a post-tax Roth 403(b) or a tax-deferred traditional 403(b) account, or even a combination of Roth and traditional.  The total of all salary deferrals must be equal to or less than the annual maximum.

When can I contribute?

While a 403(b) plan can make you wait up to a year to participate, many plans let you to begin contributing with your first paycheck. Some plans also provide for automatic enrollment. If you’ve been automatically enrolled, make sure to check that your default contribution rate and investments are appropriate for your circumstances.

What about employer contributions?

Employers don’t have to contribute to 403(b) plans, but many will match all or part of your contributions. Try to contribute as much as necessary to get the maximum matching contribution from your employer. This is essentially free money that can help you pursue your retirement goals.

Note that your plan may require up to six years of service before your employer matching contributions are fully vested (owned by you), although most plans have a faster vesting schedule.

Should I make pre-tax or ROTH contributions (if allowed)?

If you think you’ll be in a higher tax bracket when you retire, Roth 403(b) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates (and future withdrawals will generally be tax free according to current tax laws).

However, if you think you’ll be in a lower tax bracket when you retire, pre-tax 403(b) contributions may be more appropriate because your contributions reduce your taxable income now. Your investment horizon and projected investment results are also important factors.

What else do I need to know?

• Your contributions, pre-tax and Roth, are always 100% vested (owned by you).
• If your plan allows loans, you may be eligible to borrow up to one half of your vested 403(b) account (to a maximum of $50,000) if you need the money.

• You may also be able to take a hardship withdrawal from your 403(b) if you have “an immediate and heavy financial need”.  Note that this should be a last resort option, as hardship distributions are taxable to the participant.

• Distributions from your plan before you turn 59½ (55 in some cases), may be subject to a 10% early distribution penalty unless an exception applies.
• You may be eligible for an income tax credit of up to $1,000 for amounts you contribute, depending on your income.
• Your assets are generally fully protected in the event of your, or your employer’s, bankruptcy.
• While your participation in a 403(b) plan has no impact on your ability to contribute to an IRA (Roth or traditional), it could impact your ability to make deductible contributions to a traditional IRA.
• Many 403(b) plans let you direct the investment of your account. Your employer provides a choice of funding arrangements (typically, mutual funds or annuity contracts issued by an insurance company). But it’s your responsibility to choose the investments most suitable for your retirement objectives.