are 403(b) Plans
plans are tax-deferred savings vehicles for employees of certain
nonprofit institutions such as schools. This article discusses
the basics of 403(b) plans, how they work, eligibility, contribution
limits, deductibility, distribution rules, and how they differ
from other employer-sponsored retirement-savings plans.
employees of educational institutions and certain nonprofit organizations,
the 403(b) plan can be a key element in their retirement-saving
strategy. Employer-sponsored 403(b) plans allow participants to
contribute pretax dollars into a retirement savings account, then
withdraw funds when they retire, permitting account earnings to
grow on a tax-deferred basis. Similar to their private sector
counterparts, 401(k) plans, 403(b) plans have a variety of rules
that govern contributions, withdrawals, and other factors that
current and potential participants should be aware of.
to a 403(b) plan can consist of pretax employee contributions,
after-tax employee contributions, and employer contributions.
Amounts contributed to a 403(b) plan and earnings thereon are
not subject to income tax until withdrawn. For 2007, participants
in a 403(b) plan can contribute up to $15,500 a year. Plan participants
who are 50 or older may also contribute an additional $5,000 in
2007. Total contributions by the employee and employer cannot
to rules that took effect in 2006, there are now two types of
403(b) plans: traditional 403(b)s and the newer Roth 403(b) plans.
A traditional 403(b) plan allows for pretax contributions so that
you can defer taxes on the portion of the salary contributed to
the plan until the funds are withdrawn, at which point contributions
and earnings are taxed as ordinary income. Also, because the amount
of your pretax contribution is deducted directly from your paycheck,
your taxable income is reduced, which, in turn, lowers your tax
burden. As noted earlier, some traditional 403(b) plans also allow
for after-tax contributions, but earnings are subject to ordinary
income taxes when withdrawn.
tax treatment of a Roth 403(b) plan is different. Under a Roth
plan, contributions are made in after-tax dollars, so there is
no immediate tax benefit. However, plan balances grow tax free;
you pay no taxes on qualified distributions.
401(k) plans, many 403(b) plans offer employer matching contributions
whereby employers elect to match all or a portion of the employee's
contribution. Under a Roth plan, matching contributions are maintained
in a separate tax-deferred account, and -- like in a traditional
403(b) plan -- assets are taxable when withdrawn.
general, penalty-free withdrawals from a 403(b) cannot occur until
the participant reaches age 59 1/2, at which point withdrawals
are taxed as ordinary income. Prior to age 59 1/2, a 10% penalty
tax is applied to most withdrawals in addition to ordinary income
are, however, certain exceptions. If a participant separates from
service in or after the year he turns 55 (and retires), if he
becomes disabled, or if he dies, the penalty does not apply. Additionally,
participants may be able to make "financial hardship"
withdrawals for specific IRS-approved reasons, such as the payment
of unreimbursed medical expenses for the participant or his/her
spouse or dependents, the down payment on a primary residence,
and qualifying tuition and fees for higher education. Keep in
mind that not all plans offer hardship withdrawals and other qualifying
factors may apply.
plans may also allow participants to borrow against their plan
balance, although not all plans offer this feature. For those
that do, a number of restrictions may apply, such as limits on
amounts that can be borrowed and payback periods. Since rules
may vary by plan, you should consult your plan administrator for
distributions from 403(b) plans must begin no later than April
1 of the year following the year in which you turn age 70 1/2,
at which age distributions are subject to required minimum distribution
(RMD) rules specified by the IRS.
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403(b)s Differ From 401(k) Plans
Although 403(b) plans are similar to 401(k) plans in many ways,
there are several differences you should be aware of -- especially
if you were formerly enrolled in a 401(k) plan. For instance,
with a 401(k), the employer must set up and administer the plan.
But with a 403(b), the employer's involvement need extend no further
than the elective payroll deductions. This means that, when you
leave your job, your money can stay in the plan -- an option that
not all 401(k) plans offer.
those plans with employer matching contributions, vesting is automatic
in most 403(b) plans, while vesting periods of up to three years
may apply to 401(k) plans. This is relevant only to the employer
contribution and earnings portion of the account; employee contributions
and earnings are always 100% vested.
those long-term 403(b) plan participants who held balances prior
to 1987, such balances are not subject to mandatory federal minimum
distribution rules (but subsequent earnings on them are). You
can defer taking a distribution on such amounts until age 75.
in mind that, like 401(k) plans, 403(b) plans do vary. You should
consult your plan administrator to see what specific features
your plan does or does not offer. It's also advisable to contact
a tax professional before withdrawing funds from your 403(b) account.
reprinted from Yahoo.com