Understanding your 403b
What is a 403b retirement plan?
A 403 b is a retirement savings plan that is designed for employees of public schools, employees of tax exempt organizations, and some types of ministers. It is also known as a tax-sheltered annuity. A 403 b plan is similar to a 401(k) plan, but it is meant specifically for public employees, employees of non-profits and religious leaders.
Types of 403 b accounts
There are several different types of 403b accounts, including the following:
- Annuity contracts through insurance companies
- Custodial accounts that are held for other people such as minors
- Retirement income accounts for employees of churches, which are normally invested in either mutual funds or in annuities
Market trend for 403b plans
The 403 b market is expected to reach $1.8 trillion. Just 50% of health care organizations and 33% of institutions of higher education use financial advisors for their 403b IRA retirement plans.
According to the National Tax-deferred Savings Association, 403b plans were first made available to public employees in 1961. At that time, the public employees were only able to invest in annuities in their plans. Beginning in 1974, the law was changed to allow the public employees to also invest in mutual funds in their 403 b plans.
Eligibility requirements for a 403 b plan
Any employees who are eligible must be allowed to participate in a 403(b) plan. Employees of tax-exempt organizations that have been established under section 501(c)(3) of the Internal Revenue Code are eligible to contribute to a 403(b) plan. These organizations are normally referred to as section 501(c)(3) organizations.
Other workers who are eligible to contribute to 403(b) plans include the following:
- Employees of public schools
- Certain cooperative hospital organization employees
- Non-military employees of the Uniformed Services University of the Health Sciences
- Tribal government public school employees
- Certain types of ministers
Eligible ministers include those who work for 501(c)(3) organizations. Self-employed ministers are eligible if they are employed by tax-exempt organizations that are qualified. Chaplains who are employed by organizations that are not section 501(c)(3) organizations are eligible if serving as a minister is a major part of their daily work tasks.
Setting up a 403b plan
Employers are the only parties that are allowed to set up 403b plans. If you are a minister who is self-employed, your organization must set up your 403(b) account. The employer’s 403(b) plan’s terms dictate when an employee is allowed to enroll in the plan. Normally, the enrollment date will be the employee’s starting date.
Who can contribute to a 403b IRA?
Employers make the contributions to 403(b) accounts. You might be able to make contributions on an after-tax basis under certain plans. Elective deferrals are agreements that allow your employer to take money out of your paycheck in order to directly contribute it to your 403(b) account.
You do not pay income taxes until you withdraw your contributions from your account unless you have a Roth account. If you contribute to a Roth IRA, you will be taxed at the time that you make the contributions. Any qualified distributions that you take will from your Roth will be free of tax.
Nonelective contributions include the contributions that your employer makes such as matching, discretionary, and mandatory contributions. You will be taxed on these contributions at the time that they are withdrawn but not at the time that they are contributed.
Contributions that are made on an after-tax basis are the contributions that you make to your 403b account or to other types of IRAs other than a Roth IRA. If you make an after-tax contribution, it will not be excluded from your income. This means that you cannot claim a deduction for it on your income tax return.
Designated contributions to a Roth IRA are types of elective deferrals that a worker chooses to include in his or her gross income. For a designated Roth account, the plan is required to maintain separate records for all of the contributions, losses, and gains.
A self-employed minister is both an employer and an employee. As such, he or she can contribute to a retirement account in both roles.
Employers are not required to contribute to a 403(b) plan. When employees contribute, the universal availability rule mandates that when an employer allows one employee to withhold a portion of his or her salary to contribute it to a 403b plan, the employer must allow all employees to do so. There are some exceptions, however, including the following:
- Employees who contribute less than $200 in a year
- Employees who also participate in a 457(b) or a 401(k) plan
- Employees who already participate in a different 403(b) plan for the same employer
- Nonresident aliens
- Employees who work fewer than 20 hours each week
- Students who perform services that fall under section 3121(b)(10)
Contribution limits for a 403b IRA
Like other types of retirement accounts, 403 b plans have contribution limits. The maximum amount contributable (MAC) is the limit of your contribution for 2019. For employees, the contributions are limited to $19,000 per year. The combined contributions of an employee and his or her employer are limited to the lesser of $56,000 per year or 100% of the employee’s most recent annual salary.
The contribution limit amount is reduced by the elective deferrals that have been made to 401(k)s, SIMPLE IRAs, SARSEPs, other 403(b)s, and plans that fall under section 501(c)(18).
Some plans allow qualified employees who have worked for longer than 15 years to make extra contributions of $3,000 for five years. For employees who are ages 50 or older, they are able to make catch-up contributions. However, their catch-up contributions will be reduced by any catch-up contributions that they make to other plans. If you make excessive contributions to your 403 b account beyond the contribution limits, you may be assessed penalties.
Withdrawals from a 403b IRA
When you turn age 59 ½, you can take withdrawals from your 403 b without penalties being assessed. You will have to pay income taxes at your ordinary tax rate on the amounts that you withdraw. If you are younger than 59 ½, you will be liable to pay a 10% tax penalty in addition to your income tax if you take withdrawals. However, there are some exceptions that may apply.
Required minimum distributions from 403b IRAs
403(b) accounts have required minimum distribution rules. You must begin taking RMDs by April 1 of the year that follows the year in which you turn age 70 ½ years old. However, there is an exception that is permitted for an employee who still works. He or she can defer the RMDs until the year following when they retire. This option is not available to employees who own more than 5% of the company.
The amount of the required minimum distributions is calculated from the Uniform Lifetime Table. If you fail to take an RMD, you will be assessed a tax penalty of 50% of the amount that you should have withdrawn. If you have multiple 403(b) accounts, you can total the RMDs and take them from any one of your tax-sheltered annuities.
Taxes and 403 b accounts
For your 403(b) accounts, you will not pay income taxes on your allowed contributions until you begin taking withdrawals after you retire. Contributions that you make to a 403(b) plan are either excluded or deducted from your income. However, this doesn’t apply to a Roth plan. Instead, you will pay income tax on the contributions that you make to a Roth plan but enjoy tax-free distributions.
Employees pay Social Security and Medicare taxes on their contributions to a 403(b) plan, including those that are made under a salary reduction agreement. You will be taxed on your earnings and gains when you withdraw them. For a Roth contribution program, you will not be taxed on your earnings and gains as long as your withdrawals are qualified distributions.
You may be eligible to claim a tax credit for your elective deferrals that you contributed to your 403(b) account. Self-employed ministers must report the total contributions that they make as a deduction on their tax returns.
If an employer does not deduct contributions that a chaplain makes to a 403(b) account from the chaplain’s earned income, he or she might be able to deduct the contributions on his or her income tax return. Employers report contributions that have been made to your 403(b) account on your W-2 form.
Terminating a 403b retirement plan
If an employer wants to terminate a 403(b) plan, that person must determine the termination date, stop contributions to the plan, establish that all benefits will be fully vested on the date of termination, and authorize the date of distribution of all benefits as soon as possible after the plan is terminated.
All of the enrollees and beneficiaries of the 403(b) plan must be notified about the termination of the plan. They must be provided with a 402(f) notice, and the assets must be distributed within 12 months of the date of termination. Under the Employee Retirement Income Security Act or ERISA, 403(b) plans may be subject to additional requirements.
Benefits and limitations of a 403 b
There are several benefits of a 403(b) plan, including the following:
- Some employers offer matching contributions
- May be eligible to take tax credits for elective deferrals that are contributed to your custodial account
- You may be able to take a loan against your 403(b) in certain emergency situations
There are also some limitations to 403(b) plans, including the following:
- Early withdrawals are subject to a 10% tax penalty
- Withdrawals are subject to a 20% federal income tax withholding if the total amount is not transferred to another qualified retirement plan or an IRA
- You must pay a surrender charge of up to 8% of the investment if you want to dissolve an annuity investment
403b vs. 401k
There are some similarities and differences between a 403b vs. 401k. A 401(k) plan is a type of employer-sponsored plan for employees who meet specific eligibility requirements. 401(k) plans are for the private sector and for for-profit employees.
Eligible employees are allowed to make contributions on a tax-deferred basis from their wages or salaries. Employers are allowed to contribute matching or non-elective contributions to the plan. They are also allowed to add a profit-sharing feature to the 401(k) plan. Some plans include employer matches up to a certain percentage. The employer contributions vest after the employees have worked at their jobs for a certain number of years.
Earnings in a 401(k) account are tax-deferred. When you take withdrawals from your 401(k), the distributions will be taxed at your ordinary income tax rate.
403(b) plans are not deemed as employer-sponsored as long as the employer does not fund contributions. The investment funds that are allowed are only qualified registered investment companies under the 1940 Securities and Exchange Act.
403(b) plans are commonly administered by insurance companies and usually offer annuities. When contrasting 403b vs. 401k plans, the latter normally offers mutual fund investments. Some employers offer both a 401(k) and a 403(b) plan. However, this is uncommon.
Tips for a 403 b
If your employer offers a 403(b) plan, start by contributing up to your employer’s matching amount. Increase the annual amount that you contribute each year. You can also contribute more when you receive additional funds from additional income, such as a bonus or raise.
Assess your risk tolerance and adjust the type of investments as time goes on and you draw closer to retirement. Make sure to monitor your account but keep a long-term view of the market. If you change or leave your job and are vested in your 403(b) plan, you can take the money with you and roll it over to another account. If you are not vested, you will lose your employer’s contributions.
Some employers require their employees who leave to roll over their accounts. Others will allow you to leave your money in the current plan. Check with your retirement account representative if you have any questions about how your plan is handled when you leave.
A 403b is specific to employees of tax exempt organizations. If you leave your job and want to roll your 403(b) account to an IRA, M1 Finance can help you have a seamless transition.
Why investors choose M1 Finance for their 403 b rollovers
M1 Finance is an online brokerage that combines the best features of a traditional brokerage together with the powerful automation of digital technology. When you choose M1 Finance, you are able to roll over your current 403(b) plan for free. M1 does not charge management fees or commission to investors, allowing you to enjoy free investing while you watch your money grow.
If you have a qualifying account, you can benefit from M1 Borrow. It allows you to borrow up to 35% of the balance in your portfolio. You can then repay the amount that you borrow at a low rate of interest and on the schedule that you choose.M1 Borrow is tax deductible and allows you to pay off expensive debt.
Access individualized accounts at M1. You are able to customize your own portfolio of stocks and exchange-traded funds. At M1 Finance, you will be able to choose investments that match your risk. You can create a custom portfolio or select a portfolio from a menu of more than 80 that have been created to meet different risk tolerances and financial goals.
Open your account and roll over your 403 b today
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