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March 3rd, 2021 by

In general, yes, a 403(b) plan for teachers is a good place to begin your retirement planning. Also known as a tax-sheltered annuity, a 403(b) plan is an employer-sponsored plan designed for employees of specific tax-exempt organizations (e.g., hospitals, churches, charities, and public schools) to invest for their retirement. Typically, the employer purchases annuity contracts or sets up custodial accounts for eligible employees who choose to participate. A 403(b) plan is technically not a qualified plan, but it is said to mimic a qualified plan because it shares some of the same features.

403(b) plan for teachers

Like a 401(k) plan, a 403(b) plan enables you to contribute to the plan on a pre-tax basis. These are known as salary-reduction contributions because they come from your salary before taxes are withheld, thus reducing your taxable income. For the year 2020, you are allowed to defer up to $19,500 a year or 100% of your compensation, whichever is less, to the plan. If you’re 50 or older, you can make an extra “catch-up” contribution of $6,500 in 2020 (additional special catch-up contribution rules may also apply). Employers will sometimes contribute to the plan as well, although employer contributions are generally not required and (if made) may be subject to a vesting schedule before you are entitled to them. Earnings (e.g., dividends and interest) on your 403(b) plan investments accrue tax-deferred. Only when you withdraw your funds from the plan, do you pay income tax on contributions and earnings. If you wait until after you’re retired to begin withdrawing, you may be in a lower tax bracket.

The combination of pre-tax contributions and tax-deferred growth creates the opportunity to build an impressive retirement fund with a 403(b) plan, depending on investment performance. You may even qualify for a partial tax credit for amounts contributed if your income is below a certain level. Also, a 403(b) plan may allow you (under certain conditions) to withdraw money from the plan while still working for your employer. Beware of these “in-service” withdrawals, however. They may be subject to both regular income tax and (if you’re under age 59½) a 10% early withdrawal penalty. A plan loan, if permitted, might be a better way to obtain the cash you need.*

Note: Your employer may also allow you to make after-tax “Roth” contributions to your 403(b) plan. Because your Roth contributions are after-tax, those contributions are always tax-free when distributed to you. But the main attraction of Roth 403(b) contributions is that the earnings on your contributions are also tax-free if your distribution is “qualified.” In general, a distribution is qualified if it is made more than five years after the year you make your first Roth 403(b) contribution, and you are either 59½ or disabled when you receive the payment.

*Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, penalty-free withdrawals of up to $100,000 may be allowed in 2020 for qualified individuals affected by COVID-19. Individuals will be able to spread the associated income over three years for income tax purposes and will have up to three years to reinvest withdrawn amounts.

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June 5th, 2018 by

403(b) plan

A 403(b) plan is a special tax-deferred retirement savings plan that is often referred to as a tax-sheltered annuity, a tax-deferred annuity, or a 403(b) annuity. It is similar to a 401(k), but only the employees of public school systems and 501(c)(3) organizations are eligible to participate in 403(b) plans.

Employees can fund their accounts with pre-tax contributions, and employers can also make contributions to employee accounts. Employer contributions can be the same amount each month or discretionary. Eligible employees may elect to defer up to 100% of their salaries, as long as the amount does not exceed $18,500 (in 2018, up from $18,000 in 2017). A special “catch-up” contribution provision enables those who are 50 and older to save an additional $6,000. Total combined employer and employee contributions cannot exceed $55,000 in 2018 (up from $54,000 in 2017).

Staying in control of your 403(b) plan

Employees have the option of choosing the types of products utilized in their funds. A 403(b) can be an annuity contract, a custodial account, or a retirement income account. It is a good idea to do a little research before selecting how you would like to use your funds. Your employer can provide you with a list of the financial instruments that are available.

Distributions from 403(b) plans are taxed as ordinary income. Withdrawals made before age 59½ may be subject to a 10% federal income tax penalty unless a qualifying event occurs, such as death or disability.

Generally, once you reach age 70½, you must begin taking annual required minimum distributions. You can receive regular periodic distributions on a schedule, or you can collect your entire nest egg as a lump sum.

Participating in a 403(b) plan may be a good way to save for retirement. Contact your employer to find out what type of plan is available and how you can take advantage of this retirement funding vehicle. And, if you’re planning to retire soon, here are some tips you should be thinking about.

Are you taking full advantage of your 403(b) plan?

Have you got multiple 403(b) accounts from different employers? We can consolidate them & look at your overall retirement plan. So, contact me for a FREE retirement strategy consultation at my office in Upper Marlboro, MD.
Contact me  1-833-313-7233.

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