CARL WATTS & ASSOCIATES
December 05, 2010
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Washington DC
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tel/fax 202 350-9002 |
403 (b)
Tax-Sheltered Annuity Plans
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The IRS established the 403(b) section of code to allow the creation of the annuities that bear its name. Annuities in 403(b) are designed and intended to provide a convenient, tax-deferred way for employees of nonprofit, government, education and cooperative hospital services organizations, to save and invest for retirement.
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If you are an employee of public schools and universities, museums, churches, research institutes, hospitals and libraries, among others, 403(b) annuities are available to you as sponsored retirement plans through these organizations.
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Because both contributions and earnings are tax-deferred until retirement and distribution, annuities in 403(b) status offer good value for the money invested, pretty much like the 401(k) plans available to employees in the private sector.
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Contributions to the 403(b) plan are limited by the IRS to $16,500 for most individuals, and the total amount of contributions by both the individual and company combined cannot exceed $49,000 or your includible compensation, whichever is smaller. Your includable compensation is made up of your taxable income as reported on your W-2 form plus any deferred compensation for Workplace Savings Plans, pretax contributions to flex accounts, and income that is excluded from the amount reported as taxable income on your W-2.
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If you are over 50, you can contribute an additional $5,500 as a catch-up contribution each year.
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If you have worked for the company for 15 years or more and have contributed less than $5,000 to your 403(b) plan on average, you may be eligible to contribute and additional $3,000 per year.
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If your contributions exceed the amount allowed, you will have to correct the amount contributed, or pay a 6% penalty.
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| You are allowed to take loans from your account, but no more than 50% of your account or $50,000, whichever is smaller, and the loan term cannot exceed five years, unless you are buying your first home. |
| You can start making withdrawals from your 403(b) plan account when you turn 59½, leave employment, suffer a disability or have a financial hardship. If you don’t qualify for distributions you are charged an additional 10% penalty. |
| You have to take minimum required distributions when you turn 70½. Minimum required distributions are determined by the IRS distribution tables and the value of your plan. |
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Like with 401(k) plans, you can have a traditional 403(b) plan or a Roth plan, which offers no tax break for contributions, but distributions and earnings come out tax free.
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There are three basic types of 403(b) annuity plans:
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A 457 plan is a type of non-qualified retirement plan also available for governmental and certain non-governmental employers (mostly for non-profits and government agencies). Because the 457 plan is mostly reserved for highly compensated employees it was called a top hat plan.
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The 457 plan is similar to 401(k) and 403(b) plans, with the key differences that there is no 10% penalty for withdrawals before the age of 49½ and designated Roth contributions are not allowed. Nevertheless, as of 2010 participants in 457 plans are allowed to treat elective deferrals as Roth contributions. 457 plans also allow independent contractors to participate.
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Contribution limits are the same as for 403(b) plans and are not affected by contributions made to other plans. Starting in 2011 contribution limits will increase by $500 per year.
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As mentioned above, if you are a 457 plan participant you may withdraw existing funds at any time with no additional penalties.
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It is worth mentioning that non-governmental 457 plans are subject to many restrictions that do not affect government plans and have varying rules for eligibility and distribution.
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