What is a 403(b)?
What types of organizations may establish a 403(b)?
How do I start a 403(b)?
What are the tax benefits to me?
Will joining this plan affect my Social Security taxes and benefits?
I only work part time. Am I allowed to have a 403(b)?
How much can I contribute?
Can I begin contributing at a level below the maximum?
Can I stop or change the amount of my deferrals?
Can my employer contribute to the plan also?
Can I transfer money from my savings account into my 403(b)?
What happens if I contribute too much to my 403(b)?
Do I have to pay taxes on my 403(b) money at some time?
When can I withdraw my funds?
Can I access my funds in the event of an emergency?
Can I leave my money to my heirs or do I have to use it for retirement?
What happens if I change jobs?
When I withdraw my 403(b) funds, can I roll them over into an IRA?
Are there advantages to rolling over into an IRA?
Other than a rollover, what payout options do I have?
Can I have a 403(b) and an IRA or other plan?
Can I invest with more than one company?
Can I participate in both a 403(b) and a section 457 plan?
Can I transfer from one company to another?
What is a 403(b)?
A 403(b) is a retirement savings plan which allows you to save pretax dollars for your retirement, thus reducing your current income tax. Your money is invested in the investment types of your choice and grows on a tax-deferred basis until you begin receiving withdrawals, usually at retirement. The selection of investments is yours. There are several options available to you. These may include fixed or variable annuities, mutual funds and life insurance. You may select one or more of these investments. You may only, however, invest a portion of your contributions in a life insurance contract.
What types of organizations may establish a 403(b)?
- Public education institutions
- Church and church affiliated employers
- Nonprofit organizations under Section 501(c)(3) of the Internal Revenue Code, The 501(c)(3) Code section describes employers organized for educational, charitable, scientific, or religious purposes. Also included are nonprofit hospitals and health-related entities.
How do I start a 403(b)?
You must first enter into an agreement with your employer, called a salary reduction agreement, authorizing your employer to reduce your salary by the amount you select and identifying the company to which the funds should be remitted. Your employer will withhold your contribution from your pay on a pretax basis, thus reducing your current Federal tax liability.
What are the tax benefits to me?
With many methods of saving, both contributions and interest income are taxable. A 403(b) offers you the power of tax-deferred saving:
- You do not pay current Federal income tax on amounts that you defer (certain states may allow deferral of state taxes as well)
- You do not pay current Federal income tax on the interest your dollars earn
Will joining this plan affect my Social Security taxes and benefits?
No, Social Security taxes are based upon your full salary without taking into account the amount you have deferred. For example, if you defer $3,000 of a $20,000 salary, your W-2 will show federal taxable income of $17,000 instead of $20,000. Social Security tax (FICA) is calculated on the $20,000.
I only work part time. Am I allowed to have a 403(b)?
Yes, part-time employees are eligible to participate in a 403(b). Any employee of an eligible organization may participate. Contract employees are excluded.
How much can I contribute?
You are allowed to contribute 100% of your includable compensation up to the elective deferral limit, as indexed. Includable compensation is your gross compensation reduced by any pretax deductions. The chart contains the dollar limits set by the IRS until 2006, along with the amount allowed for catch-up contributions. Catch-up contributions are allowed by those who are 50 or older in the given plan year. The actual amount may vary based on your employers specific plan design.
| Year |
Maximum tax-deferred
contribution limit |
Catch-up contribution limit |
| 2004 |
$13,000 |
$3,000 |
| 2005 |
$14,000 |
$4,000 |
| 2006 |
$15,000 |
$5,000 |
Can I begin contributing at a level below the maximum?
Yes, and the sooner you begin contributing the better off you will be in the long run. You can take advantage of compound interest and potentially accumulate a larger nest egg.
Can I stop or change the amount of my deferrals?
Yes, you can generally stop your contribution or change your deferral amount at any time. However, your employer may limit the number of changes you can make in a year.
Can my employer contribute to the plan also?
Yes, your employer can contribute to the plan on your behalf.
Can I transfer money from my savings account into my 403(b)?
No, all contributions must be a salary reduction through your employer. You may increase your contributions through your employer and use the savings for living expenses, however.
What happens if I contribute too much to my 403(b)?
There are specific rules relating to over contributions and a penalty tax is usually assessed. If you do over contribute, it is a good idea to correct it as quickly as possible.
Do I have to pay taxes on my 403(b) money at some time?
Your contributions go into the plan on a pretax basis, allowing you to reduce your taxes during your working years. You will be taxed on this money, however, as you withdraw it from the plan. It is possible that you may be in a lower tax bracket at the time you begin to withdraw the funds.
When can I withdraw my funds?
You must qualify under IRS guidelines to take a withdrawal. Normally you can withdraw your funds when you attain age 59 ½, terminate employment, retire or become disabled. Your beneficiaries can withdraw funds upon your death. Your plan may also allow for loans, hardship withdrawals or in-service distributions. Withdrawals taken before age 59 ½ may incur a 10% excise tax in addition to Federal income taxes. Before you can roll over to another eligible plan or IRA, you must also qualify to take a withdrawal. Surrender charges may also apply.
Can I access my funds in the event of an emergency?
Your 403(b) account is intended for retirement purposes. You should look at other alternatives, if possible, to satisfy emergency financial needs. Your contract may allow for policy loans, which might be a better alternative than a withdrawal, assuming you are able to meet the required quarterly payments. The IRS does allow withdrawals due to financial hardship. A hardship distribution is one that is made because of the immediate and heavy financial need of the employee which cannot be met from other resources.
Examples of immediate and heavy needs are:
- Medical expenses for you and your family, not reimbursed by insurance
- Payment of college tuition for you, your spouse, children or dependents
- Purchase of your primary residence
- To prevent foreclosure or eviction from your primary residence
Financial hardship rules allow you to withdraw only the amount necessary to meet the need, and require that you access all other sources first. In addition, you must discontinue your contributions to your 403(b) for a six-month period thereafter. You may withdrawal the entire balance, including the interest earned, in your annuity account if the contributions were made prior to 12/31/88. Withdrawals made on contributions after that date cannot include interest earned. All contributions to a 403(b)(7) mutual fund are accessible. Withdrawals from a 403(b) are considered premature distributions if taken prior to age 59 ½ and are subject to a 10% excise tax in addition to Federal taxes.
Can I leave my money to my heirs or do I have to use it for retirement?
The IRS requires that you begin taking distributions no later than April 1st following the year you attain age 70 ½ or retire.
What happens if I change jobs?
If you go to work for another organization eligible to sponsor a 403(b), you may continue your 403(b) with your new employer. If not, your 403(b) may simply remain inactive and continue to accrue earnings until retirement. You may also roll over your 403(b) into a traditional IRA, 401(k), 457 or another eligible qualified plan. The new plan must be willing to accept the funds.
When I withdraw my 403(b) funds, can I roll them over into an IRA?
Once you qualify for a withdrawal by terminating employment, retiring, becoming disabled or attaining age 59 ½, you can roll over any percentage of your distribution into a traditional IRA, 401(k), 457, or any other eligible plan.
Are there advantages to rolling over into an IRA?
Not necessarily. You may wish to consolidate multiple accounts into a single traditional IRA or there might be investment opportunities that are not available in your 403(b). You may not roll over a 403(b) directly into a Roth IRA, however. There are several advantages that your 403(b) offers that are not available in a traditional IRA:
" If your 403(b) plan allows loans, you may borrow from your plan. You may not borrow from an IRA.
" If you work to age 55 and take early retirement, there is a special exemption from the premature withdrawal penalty for 403(b)s. For an IRA, you would have to attain age 59 ½ before you would be exempt from this penalty.
" Typically, at age 70 ½, you must begin taking distributions from your plan. This requirement is waived if you participate in a 403(b) and continue active employment. There is no exemption under a traditional IRA. And under an IRA, you must include the entire account balance in calculating the required minimum payment, but the 403(b) offers the advantage of deferring the 12/31/86 account balance to age 75.
Other than a rollover, what payout options do I have?
Your plan may allow you to select various forms of payout. Generally these include a variety of annuity, systematic withdrawal or lump-sum distributions.
Can I have a 403(b) and an IRA or other plan?
Yes, but you should be aware of the rules that apply. You are eligible to have a traditional IRA; however, the deductibility of the IRA will be dependent on your compensation level. You may also have both a 403(b) and Roth IRA.
Can I invest with more than one company?
Yes, but make sure your contributions to all companies are within the maximum limits. If you participate in more than one plan, you must aggregate contributions to both plans in determining your elective deferral limit.
Can I participate in both a 403(b) and a section 457 plan?
Yes, you may contribute to both a 403(b) and a 457 plan. The maximum you may contribute is a total of 100% of includable compensation up to the elective deferral limit in each plan. If you are eligible for the "over 50" catch-up, your catch-up contributions to both plans must not exceed the "over 50" catch-up limit.
Can I transfer from one company to another?
Yes, you may transfer all or a portion of your account from one carrier to another. This is done under Revenue Ruling 90-24 which allows for direct exchanges of a contract.
Variable annuities and mutual funds are subject to market risks, including the potential loss of principal invested.
Guarantees and benefits are subject to the claims-paying ability of the underlying insurance company.
