Online Guide to
403b Retirement Plans

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403b (n. - definition) - a retirement plan named after a section of the Internal Revenue Code that enables employees of non profit organizations to defer salary on a tax free basis.

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  • The IRS approved 403b salary deferral retirement program started in 1961.

  • Contributions to these type plans are tax deductible, tax deferred while inside plan, and taxable as ordinary income upon distribution.

  • Contributions to 403b plans generally take one of three forms: a) only employees make contributions through a salary-reduction agreement b) only the employer makes contributions c) the employee makes contributions and the employer makes a matching contribution.

  • Every dollar contributed to your 403b plan is tax deferred. Your gross income is reduced by the amount of contribution to the plan and this consequently lowers your current federal income tax liability.

  • There is no current tax within the plan on gains, dividends and interest income.

  • If the employer makes contributions to the plan then the plan is subject to ERISA (Employee Retirement Income Security Act 1974) which regulates the operations of many pension and retirement plans.

  • If there are no employer contributions then the plan is not subject to ERISA, unless the plan is involuntary, or the employer exerts too much influence in plan administration, or the investment selection.

  • Generally, most plans are funded by employee only contributions.

  • The 403b plan is typically designed for retirement; but, prior to retirement access is available by simply withdrawing the funds; however, the IRS will impose normal income taxes on the disbursement plus a 10% penalty tax for early withdrawal. This 10% penalty tax might be waived for financial hardship reasons, or if disabled based on the IRS's disability definition. Access is also available through loans.

  • Tax-deductible contributions to the 403b plan can only come from salary deductions and these deducted monies can only be placed into plans offered through and made available by your employer.

  • An employee cannot directly fund their plan.

  • By law, employee investment in 403b plans is limited to investing in mutual funds, variable annuities and fixed annuities only.

  • As of 2005, employees can deduct 100% of salary up to $14,000 and place those funds into these plans.

  • Plus for 2005 a $4000 catch up contribution provision is available for individuals over 50 years of age.

  • An additional catch-up provision is available for participants that did not participate in the plan earlier, subject to length of employment rules.

  • Employees are always 100% vested and own their participation in the plan.

  • For whatever reason, once the salary deductions are in the plan, an employee can move the funds to any mutual fund or variable annuity they want which offers 403b accounts; in most cases, without the consent of the employer.

  • If the employer placed monies into the 403b plan for your account, then ERISA rules apply and there might be and probably are some restrictions on any movement from plan.

  • Upon departure or retirement from an institution which offered a 403B retirement plan an ex-employee participant can move his plan into his/her IRA, or can move his/her plan into a 403b designated account.

  • Other flexible rollover options to other type retirement plans available as of 2002.

  • Participants in plans prior to 1987 can defer withdrawals on those pre-1987 dollars until the age of 75 versus 70 1/2.

  • As of 1997, working participants in these plans can defer mandatory withdrawals as long as employed.

  • Starting in 2004, some organizations can have both 457 Plans and 403b Plans side by side, or other eligible plans and eligible employees can participate fully in both.

  • Various types or securities and insurance products are available to fund 457 Plans.

  • All Mutual Funds, Variable Annuities and Variable Life Insurance policies are offered by prospectus ONLY. For complete information including charges and expenses obtain a prospectus, and read it carefully before you invest.

  • Mutual Fund, Variable Annuity and Variable Life prospectuses are available directly from the issuing companies when product information is requested, and in some cases, they can be downloaded directly on the issuing company's internet website.

  • The tax deferral characteristic associated with annuities and variable annuities is not needed when used in an account that is by definition tax deferred (retirement accounts) and according to some sources variable annuities generally have higher fees and internal expenses than mutual funds.

  • Systematic and dollar cost averaging within Mutual Funds, Variable Annuities and Variable Life insurance policies does not assure a profit and does not protect against loss in declining markets. It involves continuous investment in securities regardless of fluctuating prices and the investor should consider his or her financial ability to continue purchases through periods of low price levels.

  • Investing in stocks, bonds, mutual funds and variable annuities does not guarantee a profit. All of these investments can lose money.

  • Stocks, bonds, mutual funds and variable annuities are not FDIC insured.

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Copyright © 1998-2007. 403b Retirement Plan Information Guide. All rights reserved.

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