Teachers’ 403(b)/Tax Sheltered Annuities Retirement Plans
403(b) retirement plans are utilized by tax-exempt organizations in the same manner that 401(k) plans are utilized by the private sector; e.g., corporations and business owners. Because annuities, which are offered by insurance companies, were the original investment vehicle used by most public schools, teachers often refer to their 403(b) plans as Tax Sheltered Annuities or TSAs. The advantages of participating in a 403(b) retirement plan are:
- Employee contributions are tax deductible;
- Investments grow tax-deferred, resulting in significantly more wealth at retirement;
- Account owners can borrow from their 403(b)
Other financial institutions, other than insurance companies, have entered the field. Tax-exempt employees now have more than one choice of investment vehicles:
- Fixed annuities, which offer a fixed guaranteed rate of return for a specific period of time;
- Variable annuities, which offer a variety of funds, from which the investor can choose;
- Custodial Mutual Funds, or 403(b)(7), offered by mutual fund companies.
Most 403(b) investors take advantage of the tax code, which allows them to roll over their 403(b), tax- free, into a self-directed/professionally guided rollover IRA, The advantage of doing so are:
- Fixed 403(b)/TSA performances are limited to the stated yield, which often are unattractive and may not achieve your investment goals;
- Investment choices in variable 403(b)s are limited to the funds offered by the insurance company.
- Variable 403(b)s often have hidden costs, which include, in addition to the management fees for the funds, the mortality and expense risk fee (M&E). The combined fees may reduce the future value of your portfolio.
- Rolling over your 403(b) into a self-directed/professionally guided IRA allows you to invest in any one or more of the universe of investments.
The triggering events that allow you to rollover your 403(b) into an IRA are:
- Separation from service
- Age 591/2
Rolling over your 403(b) into a self-directed/professionally guided IRA allows you to invest in the universe of investments available to you.
403(b) Contribution Limits
The maximum potential 403(b) contribution is $49,000 per year for fiscal year 2009. The following is a breakdown of the maximum potential 403(b) contributions:
- Maximum basic salary deferral an employee can contribute to their 403(b) plan from their salary is $16,500.
- The “catch-up provision” allows employees 50 years and older to contribute an additional $5,500 per year. This is in addition to the $16,500 they can put aside as a regular employee.
- The Lifetime Catch-Up provision is available to employees who have worked for a qualified organization for 15 years or longer and have contributed less than $5,000 per year, on average, to their 403(b) plan.
- 403(b) contributions, combined with any matching funds provided by the employer, cannot exceed 100% of compensation or $49,000.
All withdrawals from your 403(b) paid to you are taxed as ordinary income. You are subject to a 10% tax penalty for any withdrawals taken before age 591/2. However, if the withdrawal is rolled over into another qualified plan within 60 days, there are no tax consequences. Required Minimum Distributions As in other types of retirement plans, the IRS requires you to begin taking required minimum distributions (RMD) by April 1st of the year following the calendar year in which you turn 701/2 years. That distribution is computed, each year, on your average life expectance. In some cases, you can use the life expectancy of the designated beneficiary of the 403(b) plan, to take advantage of the longer life expectancy…as in the case where one’s spouse is substantially younger than the other.
If you do not take your required minimum distribution 403(b) withdrawals, the IRS will impose a 50% excess accumulation tax.
This article provides additional information on 403(b)s.
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