Have a question about your 403(b) ?
What is a 403(b)?
Like its relative, the 401(k) plan, a 403(b) plan is named after its section of the Internal Revenue Code. A 403(b) plan is a tax-deferred retirement plan offered to employees of the government and tax-exempt organizations established under section 501(c) (3) of the Internal Revenue Code, such as schools, religious facilities, hospitals and charities. The main difference between a 401(k) plan and a 403(b) plan is that 403(b) plans are available to tax-exempt organizations only.
Funding Your Future
Your 403(b) may be funded by one or more of the following common contribution options:
· Employee salary deferral contributions – Employees elect a specified dollar amount or percentage of their salary to be deducted from each check before taxes, and placed into their 403(b).
· Nonelective contributions – Employers contribute a specified dollar amount or percentage of the employee’s salary.
· Matching contributions – Employers contribute to the employee’s retirement fund based on a specific formula framed around how much the employee elects to contribute from his or her salary. For example, a common company-match program is 50 cents for every dollar contributed by the employee, up to the first 6 percent of total salary deferment.
While a 403(b) may be funded by any combination of the above options, employer contributions are not required. Other funding rules include:
· Vesting - Though the “free money” that comes from employer contributions is never a bad thing, many companies establish a vesting schedule that allows employees to gain entitlement to employer contributions based on length of employment. Employees are always 100 percent vested in their own contributions, however, as those funds originally belonged to them to begin with.
· Contribution limits - Employees are in control of how much they contribute to their 403(b), so long as they stay within the annual contribution limits set by the IRS. In 2015, employees under the age of 50 may contribute up to $18,000.
· Catch-up contributions - Employees over the age of 50 may make additional contributions up to a specific limit set by the IRS. In 2015, the catch-up contribution limit is an additional $6,000.
Growing Your Funds
Participants of a 403(b) plan may invest the funds from their account into one or more investment options, including stocks, bonds and cash options. While some investments are safer than others, no investment guarantees a return or is risk-free. As with many other retirement plans, asset allocation (a healthy mixture of stocks, bonds and cash) is an effective way to protect your funds while potentially generating a positive return. Employees may elect where their funds are invested, as well as how much goes to each selection. They may choose to invest certain amounts or percentages to multiple options, invest all of their funds into one option or decline to participate altogether.
The nature of a 403(b) plan is to save money until you reach retirement or, by rule of the plan, at least age 59 ½. Withdrawing money from the plan prior to reaching a qualified age may result in a 10 percent tax penalty, in addition to the regular taxation that comes with a withdrawal. The following are exceptions to the tax penalty rule when withdrawing funds early: severance from employment, disability, death or other financial hardships, such as avoiding foreclosure, buying your first house or funding higher education.
Regardless of the reason for early withdrawal, extracting funds from your 403(b) is also extracting from your financial future. However, there is a way to make sure that the funds you withdraw are returned to your 403(b) plan by taking out a loan against your 403(b) plan. Loans from your 403(b) plan are nearly identical to most other loans–you have to pay the loan back on time or face a penalty. If not, the loan is considered an early withdrawal, and is subject to the 10 percent tax penalty, plus interest. The beneficial difference is that you are paying yourself back for what you borrowed, and the interest that you pay on the loan also goes to your retirement fund, thus increasing the overall amount in your portfolio.
However, borrowing a loan against your 403(b) plan is not always better than taking out a traditional loan. For example, when you borrow money from your 403(b), you are taking money that would ordinarily be invested, thus decreasing your chances of larger growth. Borrowing a different loan would ensure that your 403(b) funds remain invested in potential growth.
What is a Roth 403(b)?
Though traditional 403(b) and Roth 403(b) plans are similar, the taxation of each type is different. Traditional 403(b) plans are taxed at the time of withdrawal, not at the time of contribution. Roth 403(b) plans are taxed at the time of contribution, and not at the time of withdrawal.
If a company offers both traditional and Roth 403(B) plans to its employees, participants may use one or both types of contributions. Employees may make traditional contributions, Roth contributions or both to a 403(b) account.
Making the Most of Your 403(b)
403(b) participants are given a lot of control with the operation of their 403(b). Because this responsibility can be overwhelming, here are 5 surefire tips to help you make the most of your 403(b):
1. Set goals. Get an idea of where you would like to be financially at the time of retirement and set contribution goals accordingly.
2. Take advantage of employer contribution programs. Not contributing enough to your 403(b) to maximize employer contributions is the same thing as denying free money.
3. Research your investment options. With the potential of significant growth, it is worth the time to research which investment options will set you up with future financial success.
4. Allocate your assets. A healthy mixture of investment options is often helpful for balancing safety and growth.
5. Leave your money alone. Your retirement fund is meant for later, not now. The tax penalties and halt in growth potential are rarely, if ever, worth early withdrawal.
Understanding Your 403(b)