403(b) Plans — Special plans for tax-exempt organizations
These flexible plans offer a number of benefits:
403(b) plans are offered only through public schools and certain tax-exempt educational organizations.
Tax-free retirement income — Some plans allow you to make contributions to a Designated Roth 403(b) account. Designated Roth contributions are made after taxes are paid, but qualified withdrawals may be taken tax free in retirement1.
Tax-deferred investment earnings — Investment earnings are reinvested and grow tax deferred, which means you don’t pay taxes on the earnings until you withdraw the money. Since all of your earnings get reinvested, your account may grow faster than a comparable taxable account.
Employer matching contributions — Many employers help their employees save by matching a portion of their contributions up to a certain percentage of pay. If your employer offers a match, consider contributing enough to get the full match amount. Otherwise, you are leaving money on the table.
Focused investment options — Participants can choose from a focused menu of investment funds that have been screened as being appropriate for diversified retirement investing. Some plans also offer “one choice” asset allocation funds that can help simplify the investment decision-making process.
Personal control — You decide how much to contribute and where to. Your contribution amount and your investment choices can be changed. If you leave your job, you can roll it into an Individual Retirement Account (IRA) or transfer your vested account balance into another employer’s. Once you reach age 59½, you can choose how and when to withdraw your money.
Catch-up contributions — If you have at least 15 years of service, you may be able to contribute up to an additional $3,000 a year, with a life-time limit of $15,000. If you are at least age 50, you may contribute an additional $5,500 in 2012. In general, the total amount of employee and employer contributions made to your 403(b) may not be more than $50,000 in 2012.
Saving for retirement while you work
If you work for a tax-exempt organization they may offer a 403(b). A 403(b) plan may offer a combination of benefits that create a powerful way to save for retirement, particularly if the plan offers matching contributions. The hands-on features put you in control of your retirement savings strategy.
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1 A qualified distribution of designated Roth contributions is excludable from gross income. A qualified distribution is one that occurs at least 5 years after the year of the participant’s first designated Roth contribution (counting such first year as part of the 5) and is made:
- On or after the participant’s attainment of age 59½,
- On account of the participant’s disability, or
- On or after the participant’s death.
If the distribution is not a qualified distribution, then the accumulated Roth 403(b) earnings will be subject to tax, and additional taxes may apply. Roth 403(b) amounts are subject to the same required minimum distribution rules as other contributions made to the 403(b) plan.
For 403(b)(1) fixed or variable annuities, employee deferrals (including earnings) may generally be distributed only upon your: attainment of age 59½, severance from employment, death, disability, or hardship. Note: Hardship withdrawals are limited to employee deferrals made after 12/31/88. Exceptions to the distribution rules: No Internal Revenue Code withdrawal restrictions apply to ’88 cash value (employee deferrals (including earnings) as of 12/31/88) and employer contributions (including earnings). However, employer contributions made to an annuity contract issued after December 31, 2008 may not be paid or made available before a distributable event occurs. Such amounts may be distributed to a participant or if applicable, the beneficiary: upon the participant's severance from employment or upon the occurrence of an event, such as after a fixed number of years, the attainment of a stated age, or disability. For 403(b)(7) custodial accounts, Employee deferrals and employer contributions (including earnings) may only be distributed upon your: attainment of age 59½, severance from employment, death, disability, or hardship. Note: hardship withdrawals are limited to: employee deferrals and ’88 cash value (earnings on employee deferrals and employer contributions (including earnings) as of 12/31/88).