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what is 403b retirement plan

The Complete Guide to 403(b) Plans

Understand the eligibility requirements and benefits of a 403(b) plan compared to traditional employer-sponsored plans to benefit from this special type of savings vehicle.

The catalog of numbers, IRS designations and names for retirement investment plans can border on befuddling. Unless you enjoy reading through mountains of pages from the Internal Revenue Code, you could miss out on putting together the perfect combination of plans that can best get you to your retirement goals. Fortunately, 401kRollover has published a series of guides on the different plans and in language that is easy to understand.

Most likely, you have never heard of a 403(b) plan because you may not be eligible. If you are eligible, the plan offers an excellent alternative to traditional 401(k) plans to save money for retirement and lower your current tax bill.

What is a 403(b) Plan?

The fact that 403(b) plans are referred to under several different names doesn’t make understanding them any easier. The plans are often referred to as tax-deferred annuity plans, a voluntary savings plan, a supplement plan or a tax-sheltered annuity (TSA).

Beyond the complexity of what to call the savings vehicle, 403(b) plans are actually pretty simple and are one of the best retirement savings options for employees. The plan is set up by your employer and receives contributions from both the employer and the employee. Eligibility for the plans is restricted to certain non-profit and public employees.

Contribution limits for the plan fall under two IRS codes, 402(g) and 415 of the internal revenue code. Section 402(g) applies to the contributions you make into the plan on a pre-tax or after-tax basis. It’s more common to make pre-tax contributions since it reduces current taxable income and lowers the taxes you owe in the contribution year. As with other retirement savings vehicles, returns in the plan grow tax-deferred until you withdraw them.

Some employers permit after-tax contributions into a 403(b) plan, also known as Roth contributions. You pay taxes on the income during the contribution year, but withdrawals are tax-free when you retire. The option can be a great choice if you expect your tax rate to be higher in retirement or to balance out your retirement tax liability with tax-deferred plans.

Section 415 applies to contributions from your employer into the plan. These can also be on a pre-tax or after-tax basis.

Am I eligible to contribute to a 403(b) Plan?

Eligibility for a 403(b) plan is what sets it apart from the 401(k) plans used by most employers. TSAs are only open to employees of a tax-exempt organization established under 501(c)3 status, such as schools, hospitals and churches. These include employees of public schools, cooperative hospital service organizations, employees of public schools organized by Native American tribal governments, and certain ministers.

If you are eligible for a 403(b) account, you are not able to set up an account yourself. Only an employer with eligible employees is allowed to set up a plan.

How Much can I Contribute to my 403(b) Plan?

what is 403b retirement plan Employer contributions in 2015 are limited to $53,000 or a 100% match of employee compensation. This can be an attractive benefit for employees of non-profit organizations.

For your own contributions, the 2015 limit is $18,000 for people under 50 years of age. If you have been working for an eligible employer for more than 15 years and have contributed less than $5,000 a year (on average), you may be allowed to contribute an additional $3,000 above the $18,000 contribution limit. These catch-up contributions are limited to $15,000 over your lifetime.

Additional catch-up contributions may be available if you are over the age of 50 years. Under these circumstances, you can contribute up to $24,000, or up to $27,000 if you elect to make the additional $3,000 annual catch-up contribution.

Contributions can be made as elective deferrals, non-elective deferrals and as after-tax contributions.

  • Elective deferrals are made under a salary-reduction agreement and allow your employer to withhold money from your paycheck to be automatically contributed.
  • Non-elective deferrals are paid by your employer and generally include matching and discretionary contributions.

Withdrawals from a 403(b) Plan

The rules for withdrawals from your 403(b) plan are generally similar to other types of retirement savings vehicles. You may begin withdrawing assets without penalty when you reach 59 ½ years and are required to start taking distributions when you reach 70 ½ years.

If contributions were made on a pre-tax basis, any distributions will be counted as income and you will be responsible for federal and state income taxes on the amount.

Taking distributions from your 403(b) account, not under the terms of a loan agreement, before you are 59 ½ will generally result in a 10% penalty on the proceeds. You may avoid this penalty under the following conditions:

  • You are laid off from employer and are at least 55 years of age.
  • You are laid off from employer before 55 years of age but take substantially equal payments for a minimum of five years or until age 59 ½ , whichever is later.
  • You become totally and permanently disabled
  • You inherit the account

You are allowed to withdraw money from your 403(b) plan under certain hardship conditions described below, but will still be responsible for the 10% penalty and any income taxes.

  • Tuition and related educational fees for immediate family members over the next year.
  • Payments necessary to prevent eviction or foreclosure from principal residence.
  • Funeral expenses of immediate family members.
  • Medical care expenses of immediate family members.

Need more help understanding the 403(b) plan and how you can use it to meet your retirement savings goals? Visit 401kRollover for information and personal assistance.

403(b) Plans: Frequently Asked Questions

How is a 403(b) different from a 401(k) plan?

403(b) plans are similar to the more popular 401(k) plans but are specific for employees of certain organizations. The two types of plans are usually identical and only differ by eligibility. One benefit of 403(b) plans is that vesting is often immediate in the plans, while those in a 401(k) plan may have to wait years to be fully vested in their employer’s contributions.

Can my employer exclude an employee from participating in a 403(b) plan?

If an employer permits one employee to make contributions into a plan, it must generally extend the right to all employees except under the following exceptions:

  • Part-time employees that normally work less than 20 hours a week
  • Certain student employees under IRC section 3121(b)(10)
  • Non-resident aliens
  • Employees contributing less than $200 annually to their plan

Are contribution limits to a 403(b) plan affected by the contributions I make to other retirement savings plans?

Yes, your contribution limit is reduced by contributions you make to other plans including: 401(k), SIMPLE IRA plans, other 403(b) plans and SARSEP plans.

Are employers required to make contributions to plans for eligible employees?

No, employers are not required to make contributions.

Can I transfer my 403(b) plan to another account or employer?

Yes, plan transfers are allowed if they meet certain circumstances.

  • Benefit restrictions of the plan must be maintained by the receiving plan
  • Accumulated benefit of the transferred plan is the same or higher after the exchange
  • Rollovers to a 401(k) or 457 plan are permitted only for eligible contributions

Are loans available on my 403(b) plan?

Yes, plans may offer, but are not required to provide, loans on plan assets.

401k retirement accounts rollover

Why is Everyone Rolling Over Their Employer-Sponsored Retirement Plans

Learn how investors are rolling over their retirement accounts for safety and stability against financial disaster

The 2008 financial crisis affected the lives of people all over the World. Long-standing investments were shattered, jobs were lost, and the systemic collapse of financial markets resulted in immense hardship.

Subsequently, retirement accounts took a major hit. Retirement investors had little to no control over the outcome as Wall Street bankers went gambling with complicated derivatives and other financial alchemy.

But there is a bright side.

People learned from the event. They found ways to take better care of their savings, to protect their retirement accounts from volatility and mismanagement, and decided to take the future of their finances into their own hands.

What did many retirees and future retirees do to protect their nest egg? They rolled over their employer-sponsored retirement plans to individual retirement accounts, and the statistics prove it.

The Great Retirement Account Rollover

401k retirement accounts rollover According to the 2014 Investment Company Institute (ICI) Fact Book, 49% of traditional IRA-owning households have made rollovers at some point in time. Nearly half of traditional retirement account owners have decided to rollover their funds from employer-sponsored accounts such as 401K and 403B plans.

More telling is the dates behind the retirement account rollover trend.

Between 1990 and 1994, 5% of IRA owners had made a rollover. Between 1995 and 1999, 10% had made a rollover. The number jumps to 29% between 2005 and 2009 and to 34% by the time 2010 rolls around.

Employer-sponsored retirement account rollovers increased 29% (from 5% to 34%) between the early 1990s and the years following the 2008 financial crisis. Why would this happen?

What we find is that individuals viewed that a portion of their losses resulted from the vulnerability and lack of control their funds experienced being under 401K plans, 403B plans, and other types of employer-sponsored retirement accounts.

According to The New York Times, 401K plans and individual retirement accounts lost $2.8 trillion in value in 2008. On average, U.S. workers lost almost a quarter (24.3%) of their 401K accounts. These are retirement accounts that people have been slowly building for years and years, and in one instant, their value plummeted. Part of the reason is due to employer control in the investment of these accounts.

Also in 2008, 72% of workers held 20% or less of their account balances in company stock. However, nearly 7% of 401K investors had more than 80% of their account balance invested in company stock. This exemplifies a mismanagement of those funds, which contributed to glaring losses. Having too much of your retirement account invested in company stock leaves you vulnerable to the company going out of business, getting bought out, or filing for bankruptcy, as what occurred in numerous companies after the financial crisis.

It is clear that investors wanted more control and transparency in terms of their retirement funds. But why choose self-directed IRAs over other investment options?

The Advantages of Rolling Over Retirement Accounts to a Self-Directed IRA

Self-directed IRAs act independently of the ups and downs of one’s employer. Funds in these accounts will not be affected if your company goes out of business, if it gets bought out, or if it files for bankruptcy. Many 401K plans were absorbed or liquidated during the financial crisis. Investors want to protect themselves from the same outcome repeating itself.

The freedom and flexibility of IRA investment options also makes rolling over to a self-directed IRA an attractive option. You have the freedom to invest in real estate, private businesses, and precious metals (a relatively stable investment) which employer-sponsored plans may not support. You also have the option of doing your own research and diversifying your funds to take on the risk only you are willing to.

401k asset investments You are typically free to invest in any or all of the following:

  • Certificate of Deposits (CD’s)
  • Bonds
  • Mutual Funds
  • Exchange-Traded Funds (ETF)
  • Stocks
  • Annuities
  • Real Estate
  • Precious Metals

With a 401K, the plan is usually set up by your employer with a large financial institution, limiting your investment options to what the institution offers.

In addition, fees for IRAs are typically lower than that of 401K plans, and your individual retirement account will retain all of the accompanying tax benefits. Stability, lower cost and control are just a few of the advantages in an IRA vs 401k account.

How to Rollover your Retirement Accounts

We advise consulting a tax advisor if you feel that rolling over to a self-directed IRA is right for you. There are many companies that understand the process, know the market, and will be very willing to guide you through the process. With a competent professional, it should not take more than two to three weeks to have your funds fully rolled over into your hands and invested to your liking.

401kRollover.com is dedicated to providing accurate, up-to-date information about 401K rollovers and custodian-to-custodian transfers, so rest assured that we are here to help and guide you to a healthy and vibrant financial future.

 

Drop your Pension Plan Before it Drops YOU

Drop your Pension Plan Before it Drops YOU

Pension plans are about to get too expensive for Corporate America. What comes next will shock you.

Corporate pension plans have been slowly bleeding out for 30 years but the new federal budget has just fired the final shot that will kill the system. New premiums make the costs of offering pension benefits to employees unmanageable and the fallout could start as early as next year.

The problem is that it’s all going to happen just as the government’s own guarantor of pension benefits approaches insolvency. Anyone with retirement assets left in the system could suffer massive losses in promised benefits.

Pension Premiums Skyrocket 310% and Become Unmanageable

The government’s newly passed budget calls for a 22% hike in employer premiums paid to the Pension Benefit Guaranty Corporation (PBGC) through 2019. That adds another $14 in cost for every employee on top of the 236% increase in per employee costs added since 2005. Put it all together and pension costs will have risen 310% over just 14 years.

Alan Glickstein, senior retirement consultant at Towers Watson, calls it ironic that the increase meant to shore up the PBGC could end up weakening it through companies cutting head count in pension plans.

Ironic? I call it catastrophic.

The PBGC admitted last year in a report that it was “more likely than not” to run out of funds by 2022 and was 90% likely to run out by 2025. The government entity provides insurance guarantees to more than 44 million people in private defined-benefit pension plans.

 

PBGC Revenue and Spending

Companies are already looking for ways to cut employees from their pensions including lump sum payouts that could lead to a huge tax bill and a 10% penalty if the funds are not rolled over quickly. New premium increases could lead to more companies simply terminating their plans with the burden falling on the PBGC. Employers do not even need to file for bankruptcy protection to pass pension responsibilities off to the PBGC under a distressed termination.

When that happens, the amount of benefits employees receive from the PBGC varies but no worker will receive more than 82% of their promised benefit and most receive much less. PBGC benefits for multi-employer plans are capped at $12,870 per year for new retirees with 30 years of service and will almost surely be reduced if the government fund gets into trouble.

Take Control of Your Money and Protect Your Assets

The 2006 Pension Protection Act (PPA) rolled back a lot of investor protection in employer 401k programs. The PPA repealed the ban on affiliated advisor fees as well as a giving employers the right to automatically enroll employees and protection against any liability of losses.

While the new premium increases put defined-benefit plans in serious jeopardy of failure, the PPA gives employers an incentive to manipulate defined-contribution plans for their own gain.

The only solution is to take control of your own money. Retirement assets held in a former employer’s plan must be rolled over into an individual retirement account to avoid the potential collapse in pension benefits. Putting assets into an account you control is the only way to be certain those assets will be there when you retire.

Rolling over your 401k plan to an individual account not only gives you control of your assets but you get greater freedom through more investment choices like real estate and precious metals besides traditional stocks, bonds and CDs.

Social Security Is Going Broke And It Could Happen Sooner Than You Think

Social Security Is Going Broke And It Could Happen Sooner Than You Think

Some Benefits May Disappear Within The Next 2 Years

The Congressional Budget Office (CBO) has issued its review of the United State’s Social Security programs and the report is nothing short of a “Doomsday Prophecy.”  The so-called “trust fund,” which is basically just a federal line item, is consuming an ever-growing piece of the federal budget pie, while costing far more than the country can afford, according to J.D. Tuccille, the managing editor of Reason.com.

How Does Social Security Work?

The two entitlement branches of Social Security are Disability Insurance (DI) and Old Age and Survivors Insurance (OASI). These branches are funded through tax revenues. The CBO analysis projects that under current regulations, the DI trust fund will be exhausted in fiscal year 2017, and the OASI trust fund will run out by 2032.  Once a trust fund’s balance reaches zero, if current tax revenues are insufficient to cover the amount of benefits owed to the citizens, the Social Security Administration has no legal authority to pay out full benefits when they come due.

The downward slide has already started. According to the Social Security and Medicare Board of Trustees, Social Security payments began exceeding tax revenues for the program in 2010.  The CBO report also warned, “As more members of the baby-boom generation retire, outlays will increase relative to the size of the economy, whereas tax revenues will remain at an almost constant share of the economy. As a result, the gap will grow larger in the 2020s…”

Are These New Concerns?

This is not the first time Social Security has faced funding concerns. These programs have been in a dire condition for many years. According to the CBO, legislation was passed in 1994 to take revenues from the OASI trust fund and transfer them into the DI trust fund to keep the DI fund from going belly up. Since then, the DI and OASI trust funds are commonly considered a combined fund. As a result, the CBO analysis cautions that if future legislation shifts resources back from OASI to the DI fund, the combined OASDI trust funds will be exhausted in 2030.

How Does This Affect the National Debt?

Cato Institute senior fellow Michael Tanner, who heads research for Reason.com with a particular emphasis on Social Security, reports that earlier this year the national debt officially topped $18 trillion, which is roughly 101 percent of GDP. This means that we now have more debt than the combined value of all goods and services produced in this country in a year. The CBO predicts the debt will climb to almost $27.3 trillion within the next 10 years.

If you think these numbers sound bad, well brace yourself, they don’t even tell the whole story. These overall debt figures don’t include the unfunded liabilities of programs like Social Security and Medicare. Keep in mind that even though these liabilities don’t show up on the country’s official balance sheet, they are still legal obligations of the US government.  If we include the expected shortfall from these programs in the nation debt,  the true debt jumps to an astronomical $90.6 trillion.

How can we address these shortfalls?

Politicians either ignore the issue, or suggest it will go away if the wealthy pay more taxes.  However, it is simply impossible to increase taxes enough to close the budget gap. More specifically, raising taxes on the wealthy falls far short of what would be required to pay for our current and future obligations.

“The simple truth is that there is no way to address America’s debt problem without reforming entitlements, notably Social Security, Medicare, Medicaid, and our newest entitlement program, Obamacare.  Social Security, Medicare, and Medicaid alone account for 47 percent of federal spending today, a portion that will only grow larger in the future. And although the spending for Obamacare has just begun, it, too, will soon consume an ever larger portion of the federal budget,” according to Mr. Tanner.

Social Security is expected to run a $69 billion cash-flow deficit in 2015. That’s the good news.  In every year after, that shortfall will worsen. Altogether, Social Security is facing future shortfalls of more than $24.9 trillion. The frustrating part is that Social Security and Medicare seem immune to reform, in large part because seniors, who tend to vote, receive the benefits, while young people, who don’t vote, get to pay the bill.

What Steps Should You Take Now?

Jason Pye of FreedomWorks.org summarizes, “Absent meaningful reforms that encourage economic growth and private ownership of retirement accounts, as more Americans retire and become eligible for Social Security benefits and Medicare (the other elephant in the room), there will be less for Congress to spend on other areas of the budget.”

Taxpayers who hope to retire someday can’t depend on governmental reforms, new legislation or some sort of miracle to occur.  We need real answers.  We need to take control of our own retirement through private ownership of retirement accounts by establishing self-directed IRAs, which give us the freedom to invest in a variety of options the government cannot destroy. Talk to one of our friendly experts at (whichever website this article is posted) today to learn how you can stop relying on the government and start realizing your true retirement potential.