To define what a 403(b) plan is, let us lean on the IRS’s definition: “A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, certain tax-exempt organizations, and certain ministers.” Inside Your IRA clarifies other questions you might have about the 403(b) plan and several features of this retirement plan.
What is a 403(b) Plan and How Does it Work?
1. Who Can Have a 403(b) Plan?
Unlike the 401(k), which targets employees of private enterprises, a 403(b) plan serves;
- employees of tax-exempt organizations under section 503(c)(3);
- employees of public school systems who are involved in the day-to-day operations of schools;
- employees of cooperative hospital service organizations;
- civilian faculty and staff of the Uniformed Services University of the Health Sciences;
- employees of public schools created by Indian tribal governments; and
- ministers or Chaplains who are employed by 501(c)(3) organizations or self-employed.
As you can see, this is a very specific market for a financial plan as it serves people from cause-oriented organizations, religious denominations, and the education sector.
Meanwhile, only an employer from an organization with a 501(c)(3) status can sponsor employees in a 403(b) plan. In connection to this, self-employed ministers cannot sponsor themselves and will need the assistance of the organization behind their religious denomination to do it for them.
2. What Does a 403(b) Do?
A 403(b) plan is similar to a 401(k) plan in the sense that it is also a retirement plan geared for the mentioned parties above. This particular plan can take on the form of an annuity contract, a custodial account, or a retirement income account.
What Investments Can I Make Through a 403(b) Plan?
403(b) plans only offer annuities and mutual funds as investment tools. Some experts do not favor investing in annuities since they accrue high charges and are often redundant with a 403(b) plan unless the plan offers fixed annuities. On another note, you can invest in stocks indirectly if you invest in mutual funds through your 403(b) plan.
3. When Can I Start Getting Benefits from a 403(b) Plan?
You can start getting benefits from your 403(b) plan when you:
- are 59 ½ years old;
- receive your severance from work;
- pass away and therefore your beneficiary will receive the distribution;
- become disabled;
- encounter hardship while paying elective deferrals on your plan; and
- have a qualified reservist distribution.
Please keep in mind the government taxes these distributions as income. Like other plans, early withdrawals incur penalties.
4. Where Can I Get Help Regarding My 403(b) Plan?
If you have questions about 403(b) plans, you can always read the IRS’ web resource on the 403(b) plan and their publication for the plan. However, if you have to make a correction or you have tax concerns, you can go to your local IRS Tax Assistance Center for support. In case you encounter issues working with the IRS, there is also an independent organization within the IRS called the Tax Advocate Service (TAS) which can aid you. You can reach them at 1-877-777-4778 or go to their website at https://taxpayeradvocate.irs.gov/.
5. Why Should I Subscribe to a 403(b) Plan?
Aside from the obvious needs the plan will fill when you retire, a 403(b) plan has the following advantages:
- Your contributions are tax-free.
- A 403(b) plan has a higher contribution limit than an IRA.
- 403(b) plans allow for higher contributions after 15 years.
- You only pay taxes during withdrawals – when you’re retired and can take advantage of lower tax brackets and tax plans for the elderly.
- Your savings grow tax-free.
- You can set up your 403(b) plan as a Roth account.
- Your employer can make matching contributions to your IRA.
6. How Does an Employee Make Contributions to a 403(b) Plan?
Generally, employers are the ones who make the contributions. However, certain plans allow employee contributions. An employee can contribute by elective deferrals or salary reduction agreements. Employers can likewise make non-elective contributions like matching contributions when an employee pays. Finally, some plans allow for after-tax contributions which cannot be deducted from an employee’s tax return.
Maximum Contribution to a 403(b) Plan
When an employee exceeds contributions to a 403(b) plan, the account opens up to penalties. To avoid this, the IRS educates employees about their Maximum Amount Contributable or MAC. The MAC has two working parts, namely the limits on annual additions and the limits on elective deferrals. If you make contributions through a salary reduction agreement, you need to find out both your annual additions and elective deferral limits. Should your employer be the sole contributor of the 403(b) plan, then you only need to work against your annual addition limits.
Meanwhile, workers 50 and above can make additional catch-up contributions.
Limit on Annual Additions to a 403(b) Plan
The limit to annual additions to a 403(b) plan is $53,000 for 2016 or $54,000 for 2017 or 100% of an employee’s includible compensation for their most recent year of service. There are of course special cases like if you have more than one 403(b) account and each one is maintained by different employers. You don’t have to aggregate them. Ministers and chaplains can likewise find ways to increase their annual additions.
Hopefully, this article has answered your basic questions on what a 403(b) plan is. What makes the plan special is that it allows people who perform a positive social action to invest and create their own retirement nest eggs. The good guys deserve an opportunity to hang their capes and take care of themselves when they hit their golden ages.
Do you have further questions about the 403(b) plan? Comment below and we’ll discuss your thoughts in a future article!