Understanding your 403b
The 403b account is one of the many retirement vehicles available to a specific set of employees within the United States. You need to know the strengths and limitations of possessing a 403b account before you place hard-earned money from each paycheck into this narrowly defined plan.
The 403b account is a special retirement account separate from the traditional 401k plans available in most work places. The federal government has established 403b among other offerings to address the specificities of unique professions. The major beneficiaries of the 403b account are public education organizations including advocacy groups, charter schools and other groups involved in advancing educational efforts. Writers, designers and teachers who work in educational settings funded by the public have access to 403b accounts through the retirement age of 59 and ½ years.
Another group that benefit from the liberal rules of 403b accounts is non-profit organizations. The span of non-profit organizations from artistic communities to hunger task forces means that any employee with sufficient hours working for a registered non-profit is eligible for 403b. One of the issues facing non-profit employees with 403b accounts is the tenuous nature of certain organizations and the shift of other organizations to a for-profit format.
A final subset of American professionals who can invest in a 403b account are self-employed ministers. The tax system is favorable to religious organizations with recognized faiths exempt from taxation at the state and federal level. Individual ministers and religious professionals who are not affiliated with a specific organization are able to save for retirement while benefiting from generous tax policies through the 403b program.
There are several forms that need to be completed before gaining access to a 403b account. The similarities with a 401k account are astounding in terms of application materials since a 403b needs to be maintained by a custodian company. The initial application by a prospective account holder depends on the financial company but a full account of total wages, desired contributions and personal information needs to be made for an expedited application.
The employer who uses a 403b account for non-profit and public education employees needs to fill out a document covering the demographics of his office. A total number of 403b recipients as well as the matching level for the employer need to be given for a provider to approve an account. This overview of a company-supported 403b account must be accompanied by individual applications by employees based on their contributions.
A final touch on a 403b application is the initial administrative fee that must be paid before a 403b account is opened. This fee ranges widely based on the number of individuals involved in the retirement account as well as the type of funds used for individual accounts. It is wise to send these documents through the mail instead of online using express services to ensure the security of confidential information.
The temptation to use a financial advisor for 403b maintenance is overwhelming for professionals with little grounding in retirement accounts. An advisor has the training, certification and experience in handling 403b issues that cannot be acquired through reading complicated instructors. You need to think about the costs and disadvantages of using an advisor for retirement planning in general and your 403b plan in specific.
Advisors offer advice specific to your 403b plan with an underlying promotional aspect made necessary by a competitive market. The majority of retirement advisors work for major financial firms and banks that want to push additional projects on account holders. The occasional advisor may not be concerned about promotions and selling premium products. On the whole, however, your 403b planner will likely try to give a sales pitch on supplementary products as a way to increase commissions.
It is important to meet with your personal advisor at least once before committing to a 403b plan at a particular company. An advisor may be skilled in explaining the tax benefits of a 403b plan but you may have a difficult time developing a trusting relationship. You need to feel out an advisor's interpersonal style and establish ground rules for future conversations that will ensure a quick response to your needs. Your advisor should offer multiple points of contact to help you get answers without setting up an appointment.
There are several investment options available to 403b account holders that meet a range of risk levels from conservative to high risk. The most common approach to retirement planning in a 403b is the use of mutual funds. A mutual fund is a grab bag of stocks, options and other financial vehicles available on the domestic and international markets that are arranged based on the account holder's desired risk. A conservative mutual fund uses domestic stocks and government bonds to ensure a decent annual return on a 403b plan. Risky mutual funds gather up tech stocks, foreign bonds and other financial tools with a potentially higher return.
It is possible to use annuities when planning for retirement using a 403b plan. Annuities feature a contract between the investor and an insurance company that locks each party into a certain type of investment. The safest annuity option for a 403b plan is a fixed annuity which guarantees a minimum rate of return each year through safe investments. You can use an equity indexed annuity to tie your retirement funds into the composite performance of the S&P 500 Index over the fiscal year.
The Employee Retirement Income Security Act (ERISA) was a law established to differentiate 403b accounts from their 401k counterparts. The United States Congress passed ERISA to provide the option for 403b plan holders to opt out of the qualified status required of all plans under 401a tax status. The effect of this law is to make 403b plans more portable and flexible for non-profit and religious employees who want to plan for retirement.
It is important for a 403b plan holder to understand that they must choose between 401a status and an exemption from 401a limitations to receive certain benefits. The main point of contention for skeptical 403b plan holders when choosing a legal status is bankruptcy protection and universal access. While a 403b holder receives some bankruptcy protection through the federal government, there is stronger protection under 401a status due to the volume of account holders. Professionals who are concerned with their long term finances should consider opting for 401a protection to deal with potential bankruptcies.
A 403b plan under ERISA does not utilize the discriminatory testing of a 401a plan. 401k plans and others under IRS code 401a discriminate based on full time status as well as total annual contributions to cut down on administrative costs. Every employee in an office that uses retirement planning under 403b laws must allow every employee to participate to meet universal availability standards set by the federal government.
Plan holders under 403b laws share the same annual contribution limits as 401a counterparts in an effort to simplify retirement planning. Non-profit workers can contribute a maximum of $15,500 each year until retirement. Individuals who make less than $15,500 each year in taxable income can donate 100% of their income into a 403b plan as a way to supplement other pension and retirement plans. An additional $5,000 can be donated by workers over 50 each year through retirement age to help anticipate financial needs upon retirement.
Employers and employees who participate in a 403b plan need to consider investment management and administrative fees as part of their financial expenses. The account provider takes out a small percentage of the total investment as a way to recoup expenses from manpower and supplies used for retirement planning. Another minor percentage of investments into a 403b account is taken out for the benefit of the investment manager. These percentages can add up to 0.5% to 4.0% of the total investment based on the size of the insurance provider as well as the nature of the investments.
The pre-tax contributions to a 403b account are not the only benefit of this special type of account. Non-profit professionals and ministers share the ability to withdraw money from their retirement account with 401k holders. There are several situations where a 403b holder can take out money without accruing penalties and additional taxes on this withdrawn money.
Professionals who retire before the age of 59 and ½ years can take out money without penalties. The victims of unfortunate accidents leading to disability and serious injury are able to pay off medical bills by withdrawing from a 403b. The widow and next of kin for a deceased 403b holder have a right to funds saved within the account without waiting until the date of maturation.
An important tool for cash-strapped 403b holders is the hardship clause provided by federal law. 403b providers are required to allow penalty-free loans for a limited number of situations defined as hardships to the account holder. An individual who is facing bankruptcy and an overwhelming debt load is able to take out a loan from his 403b account to cover expenses. Payments for emergency medical expenses and surgeries can be made without a large penalty from the financial provider. The down payment on a home for first-time buyers can be taken from this type of retirement account. A final way to take out penalty-free money from a 403b account is to pay off tuition for 12 months of school.
It is important to look at the characteristics of your 403b plan custodian before you invest your income. The custodial company can range from a regional investment firm to an international financier which manages thousands of large-scale accounts. While size does not always matter when it comes to a 403b custodian, it is a good idea to invest with a company that has the resources to get a bigger return on your investment. A prospectus covering a sample 403b account as well as the various investment plans available through the company can show you the market strength of your 403b custodian.
The companies that your custodian invests in are just as important to research as the custodian itself. Insurance companies that provide a return on your annuity have no connection to your custodian so additional research is necessary. A custodian who invests in tech companies with a poor track record and potential legal problems is not likely to consider your individual account when making investments. It is a question of finding a 403b custodian with good judgment as well as connections to a variety of industries when planning your retirement.
One of the main tax advantages of a 403b plan is the use of pre-tax wage deferrals to fund retirement. Your annual contributions into a 403b account cannot be taxed at the state and federal level until you begin withdrawals at age 59 and ½. Some investors are skeptical about investing money only to be taxed later in life when financial liquidity is much less likely. It is important for investors to take advantage of pre-tax funds in a 403b plan by shifting money into savings and other retirement accounts to ensure multiple sources of income in old age.
There are other advantages to 403b accounts that arise at tax time. Federal tax law allows a 403b holder to use 50% of up to $2,000 in 403b investments as a tax credit each year. Account holders can use IRS Form 5500 to report their dividends and contributions into a 403b account in a matter of minutes. The final benefit for 403b plan holders is the ability to split money into multiple retirement accounts. An individual can invest in certified deposits, 403b and government pensions as well as a simple savings plan without penalty to cut down on annual tax burdens while preparing for life after work.