403(b) Plan

403(b) Plan

What is a 403 (b) plan?

A 403 (b) plan (in various forms: 403b or 403 b plan) is a retirement account for certain employees of public schools and tax-exempt organizations. Participants include teachers, school administrators, professors, government employees, nurses, doctors and librarians. Ministers of religion can also participate in these plans. Note, however, that there is a special type of plan – a 403 (b) (9) – which is specially designed for employees of religious institutions.TheThe

Key points to remember

  • 403 (b) s look like 401 (k) s, but they serve employees of public schools and tax-exempt organizations rather than workers in the private sector.
  • The advantages of a 403 (b) compared to a 401 (k) may include faster acquisition of your funds and the possibility of making additional make-up contributions
  • Investment choices may be more limited with a 403 (b), however, and some accounts offer less protection from creditors than 401 (k) s.

Understanding plan 403 (b)

The features and benefits of a 403 (b) plan are largely similar to those found in a 401 (k) plan. Both have the same basic contribution limits: $ 19,500 in 2020 ($ 19,500 in 2019). The combination of employee and employer contributions is limited to the lesser of $ 57,000 in 2020 ($ 56,000 in 2019) or 100% of the employee’s last annual salary.TheBoth also offer Roth options and require participants to turn 59 and a half to withdraw funds without incurring a penalty.TheLike a 401 (k), the 403 (b) plan offers $ 6,500 in catch-up contributions for those 50 and over ($ 6,000 in 2019). It also offers a special plan for those with 15 or more years of service with the same employer (see below).TheThe

Although it is not very common, your professional situation could give you access to both a 401 (k) plan and a 403 (b) plan. In these cases, employees can contribute to both accounts. However, your overall contribution to the two plans cannot exceed the limit of $ 19,500 ($ 19,000 in 2019), not counting the catch-up contribution of 401 (k).

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403 (b) Plan

Benefits of a 403 (b) pension plan

Earnings and returns on amounts from a regular 403 (b) plan are tax deferred until withdrawn.TheGains and returns on amounts in a Roth 403 (b) are tax-deferred if withdrawals are eligible distributions.TheThe

Employees with a 403 (b) may also be eligible for matching contributions, the supply of which varies depending on the employer.ThePlans that do not offer such agreements with employers deprive employees of the essentially free money they provide, but they can result in lower costs for customers. 403 (b) who lack matching contributions are not required to follow the onerous monitoring rules of the Employee Retirement Income Security Act (ERISA), which means that their administrative costs may be lower than those 401 (k) or other funds subject to greater scrutiny. (However, non-ERISA status also has some potential drawbacks for account holders, as noted below.)

Many 403 (b) plans acquire funds over a shorter period than 401 (k), and some even allow immediate acquisition of funds, which 401 (k) rarely does. In addition, if an employee has 15 or more years of service with certain not-for-profit or government agencies, they may be able to make additional make-up contributions to a 403 (b) plan than those with a 401 plan. (k) cannot. Under this provision, you can contribute an additional $ 3,000 per year up to a lifetime limit of $ 15,000. And unlike the usual retirement provision, you don’t have to be 50 or older to take advantage of it.TheBut you must have worked for the same eligible employer for 15 years.

403 (b) plans are exempt from non-discrimination tests, which are designed to ensure that management or highly paid workers do not receive disproportionately more benefits from a pension plan than other workers.

Disadvantages of a 403 (b) plan

As with a 401 (k), funds withdrawn from a 403 (b) plan before the age of 59 and a half are subject to a 10% tax penalty, although you can avoid the penalty in certain circumstances, such as separation from an employer at 55 or over. , who must pay qualified medical expenses or become disabled.TheThe

A 403 (b) may offer a more limited choice of investments than other types of pension plans. The reason: 401 (k) tend to be administered by mutual fund companies and therefore offer a multitude of these diverse and versatile investment options. Most 403 (b) plans now offer mutual fund choices, although in a variable annuity contract in most cases. However, fixed and variable contracts and mutual funds are the only types of investment allowed in these plans; other securities, such as stocks and real estate investment trusts (REITs), are prohibited.TheThe

The presence of an investment option which 403 (b) s favor is, at best, a mixed blessing. When 403 (b) was invented in 1958, it was known as a tax-sheltered annuity. Although times have changed and 403 (b) plans can now offer mutual funds, as noted, many still focus on annuities. These investments have certain advantages, but financial advisers often advise against investing in 403 (b) annuities and other tax-deferred investment plans for a variety of reasons.

Note that 403 (b) who do not benefit from ERISA protection, as is generally the case for those who have no correspondence with the employer, may not have the same level of protection against creditors as types that require ERISA compliance, including 401 (k) s.TheIf you risk creditors suing you, speak to a local lawyer who understands the nuances of your state. Laws can be complex.

Other disadvantages of non-ERISA 403 (b) include their exemption from non-discrimination tests. Performed annually, this test is designed to prevent management or highly paid employees from receiving a disproportionate amount of benefits from a given plan. In addition, the lack of ERISA protection means that the plan does not have to follow ERISA standards to ensure the safety of the plan.

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