403b Planning

Similar to a 401(k), 403(b) plans are typically offered to individuals who work for state agencies and nonprofit organizations as defined by section 501(c)(3) of the Internal Revenue Service (IRS) code. Many public teacher retirement plans are actually 403(b) plans. Named after the IRS code under which they fall, 403(b) plans offer many of the same advantages and benefits of 401(k) plans. The main difference between the two types of retirement plans is simply which types of employees can use them.

Just like a 401(k), a 403(b) plan allows employees to contribute a designated portion of their salary to their retirement account. Contributions must be deducted from the employee’s paycheck and cannot come directly from the employee. Employers are permitted to make annual matching contributions up to $50,000 or 100% of the employee’s salary, whichever is less. This amount is adjusted each year to account for inflation. Accounts are managed by third party investment companies, which offer any number of investment products ranging from annuities to mutual funds – stocks and bonds are prohibited investments in a 403(b) plan. The maximum yearly contribution amount for 2012 is $17,000.

For individuals over age 50, this amount increases to $22,500 in 2012 and is scheduled to remain the same in 2013. Additionally, if you have worked for your employer for at least 15 years and your yearly contributions average $5,000 or less, you are allowed to contribute an extra “catch up” amount of $3,000 per year, not to exceed $15,000 total. All contributions are tax deferred, which means the employee does not pay taxes on the money until retirement. Because most people earn less annual income at retirement age than they do while working, this likely means a lower tax bracket and lower annual income taxes after retirement.

Under a 403(b) plan, the earliest retirement age is 55, when you can begin making withdrawals without penalty. If you continue working, you can start withdrawals at age 59½ without incurring any penalties. Depending on the company administering your plan, it is generally possible to borrow against your 403(b) retirement account, however, IRS rules limit the loan amount to $50,000 or half the total account value. Loans must also be repaid within five years of withdrawal, with the limited exception of loans taken out to purchase a new home. Hardship withdrawals, which differ from loans and are not repaid, are available but should be used only when absolutely necessary, as taking money out of the plan before retirement age means paying income tax plus a 10% penalty on the funds removed. As with 401(k) plans, 403(b) plans can be rolled over into a new 403(b) if you change employers.

As with any type of retirement plan, it is crucial to thoroughly review your provider’s policy to determine whether a particular option best suits your long-term goals.

Here's information about retirement planning and a Roth IRA.

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