403B Retirement Plans
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 Calculation generally allows you to contribute up to the lesser of:
100 percent of your applicable compensation as defined by the Internal Revenue Service (IRS); or
General Limit: $19,500; Age 50 and over: $26,000
2021 and thereafter –
General Limit: Indexed for inflation; Age 50 and over: Add $6,000 to general limit
If your plan permits, and you have 15 or more years of service, you may also be able to make special catch-up contributions to the plan, in addition to the age 50 catch-up contribution.
If your plan allows Roth 403(b) contributions, you can split your contribution between pre-tax and Roth contributions any way you wish.
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 make a hardship withdrawal if you have an immediate and heavy financial need. But this should be a last resort — hardship distributions may be taxable to you, and you may be suspended from plan participation for six months or more if you take the withdrawal in 2019.(Beginning in 2020, suspension of participation will not be permitted, per IRS rules proposed in November 2018.)
- 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.
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Fellowship Financial Planning
502 W Riverside Ave, Suite 201, Spokane, WA 99201
Investment advice and financial planning offered through Financial Advocates Investment Management (FAIM), a registered investment advisor, DBA Fellowship Financial Planning (FFP). FAIM and FFP are separate entities.