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Retirement Plans Review - The 403b Retirement Plan

 


We have provided an overview of the 401(k) . We find that so many people look at the 403(b) retirement program and feel that the two are quite similar. Let's take a look at the 403b retirement plan and see what it has to offer.

The similarities of 401(k) and 403(b) retirement plans

First of all, let's look at the similarities between the 401(k) and the 403(b) retirement plans. The similarities are as follows;

  • They both allow the individual to put money away for retirement on a pre-tax basis.
  • They both have been named for the relevant tax code from which they arise.
  • They both grow money for the individual account holder to retire on.

Retirement Plans Review - The 403b Retirement Plan

The differences between 401(k) and 403(b) retirement plans

What makes the 403 (b) different to the 401 (k) in the most significant way is the eligibility criteria; only employees of public schools and certain tax-exempt organizations can participate in a 403(b) plan. Tax exempt organizations might include those exclusively set up for religious, charitable, scientific, public-safety testing, literary, or educational purposes. For example, K-12 public schools, colleges, universities, hospitals, libraries, philanthropic organizations, and churches are likely to have eligibility to contribute to a 403(b) retirement plan. There are other differences:

  • 403(b) participants cannot invest in individual stocks.
  • Annuity and variable annuity contracts with insurance companies are usually their only investment options.

Participating in a 403(b) retirement fund

The individual sets aside money on a pre-tax basis through a salary reduction agreement with their employer- much like the 401(k) retirement fund. The funds are then directed to a financial institution of the employers choosing. Much as the 401(k) plan, the money then grows tax-deferred until retirement. When withdrawn, it is taxed as ordinary income.

  • Usually, the maximum contribution permitted is around $10,500 or 20% of salary, whichever is less.
  • Determination of the MEA (maximum exclusion allowance depends upon: salary, years of service with current employer, and prior tax-deferred contributions by the employee and the employer.
  • There is a "catch-up clause" in the 403(b) retirement plan. This means that if you haven't reached the maximum contribution in the previous year, a special "catch-up" provision in the 403(b) allows you to increase your annual contribution by $3,000 approximately.
  • To qualify you must have completed at least 15 years of service with the same employer

Changing jobs

With the 401(k) retirement plan, the fund follows you when you change jobs. What happens with the 403 (b)? You can:

  • Transfer the money into your new employer's 403(b) plan.
  • Leave it where it is, especially if you like your current investment choices. Be warned however that if the balance is below $5,000 some employers require you to move the money along with you.
  • You can take it as lump sum
IMPORTANT NOTE: A 403(b) cannot be rolled into a 401(k).




Withdrawal of funds

If you want to withdraw without penalty you can only do so under the following conditions:

  • When you reach the age of 59.5
  • When you enter retirement
  • If you becomes disabled
  • In the form of a loan

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