403(b) FAQ | BRYAN SCHURTER

What is a 403(b)?
What is a Roth 403(b)?
When was the 403(b) established?
Who can contribute to a 403(b)?
Why Contribute to a 403(b)?
How does a 403(b) plan work?
Are part time employees eligible to contribute to a 403(b)?
How much can I contribute annually?
What investment options are available to 403(b) participants?
How do I set up a 403(b)?
Can I change the amount I contribute?
Can I stop contributing altogether?
Do I need my employer’s consent to contribute to a 403(b)?
How is a 403(b) different from a TSA (tax-sheltered annuity)?
How is a 403(b) different from a 401(k)?
When can 403(b) money be accessed without penalty?
Can I borrow money from my 403(b) account?
What happens to 403(b) money in the event of death?
How will distributions from my 403(b) be taxed?
When must I withdraw money from my 403(b) account?
Can I contribute to a 403(b) and a Roth IRA?
This all seems way too confusing, is there someone who can assist me with all this?

What is a 403(b)?

The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. See IRS Publication 571 for IRS details on the 403(b).

Similar to the Roth IRA, the Roth 403(b) allows individuals to contribute after-tax dollars to an account that will grow tax-deferred. Withdrawal of contributions will not be taxed. Employees have the option of directing 403(b) contributions to either a traditional 403(b) or a Roth 403(b), or some combination of the two plans that does not exceed that year’s contribution limits ($17,000 in 2012).

The Traditional 403(b) was established in 1958 by the federal government to encourage employees in certain tax-exempt organizations to establish retirement savings programs. The name refers to the relevant section in the Internal Revenue Code.

The Roth 403(b) was created as part of the Economic Growth and Tax Reconciliation Act (EGTRRA) of 2001 and became available in January 2006.

Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code. These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations. Participants include teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians, and ministers.

For a healthier retirement of course! Most employees of educational institutions and other non-profit organizations are provided with a pension upon retirement. A 403(b) plan can provide a healthy supplement to a pension, providing for a much more comfortable retirement.

You set aside money for retirement through a salary reduction agreement with your employer. You choose from among the vendors offered by your employer where your money is to be invested. Money in a Traditional 403(b) account grows tax deferred until withdrawal at retirement. Money in a Roth 403(b) grows tax free and may be withdrawn tax free as well.

In most cases, for teachers and classified employees, the answer is yes! If you do have any questions, you may contact me, or contact your HR department for more information.

For 2012, most eligible 403(b) employees are able to contribute $17,000 (which is an increase of $500 from 2011)

In addition, if you are 50 or older at any time during 2012, you may contribute an additional $5,000.

Furthermore, there is also a 15-Year Service Credit Catch-up provision. This special provision increases your elective deferral limit by as much as $3,000 more than the current $17,000 limit (as of 2012). To qualify you must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and you cannot have contributed more than an average of $5,000 to a 403(b) in previous years. The increase in your elective deferral limit cannot exceed $3,000 per year under this provision, up to a $15,000 lifetime maximum.

In most cases, there are 4 options available.

1. Fixed annuities are contracts with insurance companies that guarantee that you will earn a minimum rate of interest during the time that your account is growing. At retirement, you may elect to receive guaranteed payments for a selected amount of time – much like you will receive through CalSTRS or some other pension company.

2. Fixed Indexed Annuities are also contracts made with insurance companies. With Fixed Indexed Annuities, you may choose to have your money invested in a fixed account or tied to the performance of a selected Stock Index — or any combination you prefer. In most cases, the money you have tied to a stock index will never lose money when the stock index negatively performs, and you will receive a portion of the gain when the market performs positively. Furthermore, the insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. As with a Fixed Annuity, you may choose to receive guaranteed payments for a selected amount of time.

3. Variable annuities are also contracts with insurance companies. With Variable Annuities you choose to invest your money in a range of investment options, which are typically mutual funds. The value of your account in a variable annuity will vary (positively and negatively), depending on the performance of the investment options.

4. Mutual funds are pools of money invested in many different securities and are managed according to set objectives. They are similar to the investments underlying variable annuities, but do not have the associated insurance fees of a variable annuity. The value of your account invested in mutual funds will vary (positively and negatively), depending on the performance of the investment options.

Contact me, of course! I am contracted with some of the best companies offering
403(b) products in school districts throughout the country.

Yes. Keep in mind that most school districts only pay once a month, so sometimes your change in contribution amounts may take over a month to go through.

Yes. You may stop and start contributing at any time. Keep in mind the money in your account is still there, and will continue to gain or lose money according to your investment choices.

Yes. Your employer must agree to make contributions to your 403(b) in accordance with a salary reduction agreement. This is an agreement between the employer and employee under which the employee agrees to take a reduction in salary or to forego a salary increase and the employer contributes that amount to a 403(b) for that employee.

Feel free to contact me anytime if you have any questions about this.

As far as the IRS is concerned a 403(b) is a TSA, and a TSA is a 403(b). The terms are interchangeable.

The 401(k) is a tax-deferred retirement plan for private sector employees, while the 403(b) is a tax-deferred retirement plan for employees of educational institutions and certain non-profit organizations. There are some other differences within the plans as well. If you have any further questions about the differences, feel free to contact me.

Generally, penalty-free distribution from a 403(b) can only occur under the following provisions:

Reaches age 59 1/2, and
Separation from service in the year turning 59 1/2 (and must be retired), or
Retire before age 59 1/2 — eligible for Substantially Equal Periodic Payments (SEPP). Participants who have retired early (before age 55), but want access to their 403(b) without penalty can do so using SEPP. This provision requires that you take a series of substantially equal periodic payments. The key is that once you start these payments they must continue for five years or until you reach 59 1/2, whichever takes longer. If you start at age 58 you must continue until you are 63 (minimum 5 years).
Financial Hardship. Consult with your investment provider to see what requirements are needed.
Becomes disabled (as defined in section 72(m)(7) of the Internal Revenue Code).
Through a Loan . Consult with your investment provider – some companies allow loans, some do not.
Death.

In most cases, yes! Though not all vendors allow loans, so it is best to contact your investment provider to see if they allow loans. Feel free to contact me if you have any questions.

Death benefits to be paid under a 403(b) plan depend on when death occurs and who is the designated beneficiary on the plan. There are many rules the IRS has in place pertaining to receiving death benefits, and therefore I would highly recommend contacting me or another tax professional before receiving any such benefits.

In most cases, the payments you receive, or that are made available to you from a traditional 403(b) are taxable in full as ordinary income. In contrast, and in most cases, payments received from a Roth 403(b) are tax free. In general, the same tax rules apply to distribution from a 403(b) that apply to distributions from other retirement plans. For more detailed information refer to IRS Publication 571. For your specific situation, please contact me or consult another professional tax advisor.

The year you turn 70 1/2. The federal government will allow you to put off paying taxes on the money for only so long. Generally, you must begin to take withdrawals no later than April 1 of the year following the year in which you turn age 70 1/2.

Yes. However, the Roth IRA has Adjusted Gross Income (AGI) limitations. The tax deduction for Roth IRA contributions will be phased out for singles and heads of households with workplace retirement plans who have modified adjusted gross incomes between $58,000 and $68,000 in 2012 ($92,000 to $112,000 for couples). For Roth IRA owners without a retirement plan at work the deduction is phased out if the couple’s income is between $173,000 and $183,000 (there is no income limit for singles and head of households).

YES! Me, of course! Please feel free to contact me anytime to answer any questions you may have. I have been assisting teachers with their retirement account since 2004, and have over 300 clients. I would be happy to assist you in any way I can.