A 403b Plan is very similar to a 401K plan. Just as a 401K plan is a retirement plan for individuals, a 403b plan is a retirement plan that is tailored for those people who work for the public educational institutions, hospitals, non-profit or charity organizations, religious organizations or museums. This retirement plan is a tax deferred plan which means that contributions come from pre-tax dollars and are therefore not subject to normal levels of income tax.
Why Start a 403b Plan?
403b plans are used for many reasons;
- They shelter income from taxes by using salary deduction forms to transfer income into an annuity type account.
- Since it is a deferred tax plan, taxes are applicable when withdrawals are made, which means that tax savings are often realized because if withdrawals are made at retirement tax brackets may be lower.
- You can take a loan from your 403b plan.
How is a 403b Plan Started?
If you are interested in starting a 403b plan the first thing to do is ask your employer if they have an established annuity provider. The employer may be able to offer you a few annuity providers to choose from and then you can select from among the ones available and state how much of your salary you would like to have transferred into the plan every month. This is done using a salary deduction form and your employer reports your reduced take-home pay on your W2 form.
There are limits on how much you can contribute annually. An individual is allowed to contribute up to $15,500 per year to a 403b plan, but if the plan is employee sponsored the combined contribution can increase to $46,000 with the employer putting in the difference. As of 2010 if you are 50 and over you can add an additional $5500 to your contributions as a catch-up for retirement.
What Type of Investments are Eligible?
If you want to invest in a 403b plan your funds need to be placed in an annuity product or in a retirement custodian account that is invested in mutual funds. These stipulations are set up by the IRS and must be adhered to.
Withdrawing From a 403b Plan
This is a very important consideration and one that you should look into with great interest. Under a Roth IRA there are no penalties for early withdrawal and this feature makes a Roth a good place to save for other milestones as well. However, under a 403b plan you can face some stiff withdrawal penalties especially in the first few years of starting the plan. Tiered interest fines for early withdrawal can start at about 8% and are usually applicable for up to eight years. This means that if the plan is closed after the first year an 8% penalty is deducted but by the eighth year the rate drops to 1%. This is not standard however so you need to find out the stipulations associated with your plan.
A 403b plan gives employees of non-profits and public sector organizations the same access to retirement funding as a 401K so they do a great job of leveling the access to opportunities for saving.