teacher retirement

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teacher retirement
Teacher Retirement Plan (n. - definition) - a retirement plan for teachers providing salary deferral on a tax favored basis under Internal Revenue Code section 403b.

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  • The IRS approved salary deferral retirement program available to teachers started in 1961.

  • Contributions to teacher retirement 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 and the employer makes a matching contribution.

  • Every dollar contributed to a teacher's 403b plan is tax deferred. Gross income is reduced by the amount of contribution to the plan and this consequently lowers the 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 teacher retirement 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 teacher retirement 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 teacher retirement plan can only come from salary deductions and these deducted monies can only be placed into plans offered through and made available through the employer. An employee cannot directly fund his/her own plan.

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

  • For 2005, employees can deduct from salary up to $14,000 and put that amount into these plans, plus an additional $4000 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 when funds are in 403b plans that are Non ERISA type, once the salary deductions are in the plan, an employee can move the funds to any mutual fund or variable annuity or annuity they want which offers 403b accounts; in most cases, without the consent of the employer.

  • If the employer placed funds or makes a match into the plan for your account then ERISA rules apply and there might be some restrictions on movement.

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

  • Other flexible rollover options to other type retirement plans became 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 teacher retirement plans can defer mandatory withdrawals as long as employed.

  • Some organizations can have both 457 Plans and 403b Plans side by side and eligible employees can participate fully in both.

  • All mutual funds and all variable annuities are offered by prospectus only. For complete information including charges and expenses obtain a prospectus, and read it carefully before you invest. A prospectus can be obtained from the issuing company, and in some cases issuing companies make the prospectus available via the internet.

  • Variable Annuities have internal expense charges, administrative fees, and mortality expense. Most Variable Annuities, (excluding “No Load” Variable Annuities) typically have declining surrender charges should the contract be totally surrendered over the first several years.

  • The tax deferral characteristic associated with 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. Teacher Retirement Plan Information Guide. All rights reserved.

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