As we saw in Part 4, a 401(k) plan allows people who work for large companies to reduce their taxable income by having money deducted from each paycheck and invested in a retirement plan. That’s all well and good if you work for a “for profit” company, right? But, what if you work for a 501(c)(3) non-profit organization; or, you work for a non-profit hospital; or, a church; or, you work in the public school system? Good news … there’s a plan designed specifically for YOU!
Known as a 403(b) plan or a Tax Sheltered Annuity (TSA), this plan functions much like a 401(k) or an IRA.
- Like a 401(k), the 403(b) plan reduces the amount of money on which you will pay federal income taxes. You will, however, still be required to pay social security and medicare taxes on this income.
- Depending on your adjusted gross income, you may be eligible for a $1,000 ($2,000 if filing jointly) Retirement Savings Contribution Tax Credit when you contribute to a 403(b) or 401(k) plan.
- Like money in a 401(k) or IRA, you will not pay taxes on your contributions or the growth and earnings on those contributions until you withdraw the money from the plan.
- The maximum contribution to a 403(b) plan is $17,000 in 2012; and, if you are age 50 or older, you can contribute an additional $5,500 under the “catch-up” provision.
- Because this plan provides a tax-sheltered environment in which your investments grow, you will be subjected to the same taxation and penalties if money is withdrawn from the plan prior to age 591/2; and, just like the IRA and 401(k) plans, you must begin taking annual minimum distributions from the plan at age 701/2.
- Just like a 401(k), you cannot establish your own 403(b) plan. These plans must be established by your employer.
While these plans are often referred to as Tax Sheltered Annuities (TSA’s), you have options regarding where and how the money can be invested.
- As the name implies, money can be invested in an annuity or variable annuity contract issued by an insurance company.
- Alternatively, the money can be invested in a custodial account made up of mutual funds. This is known as a 403(b)7 plan.
- Churches can establish retirement income accounts under section 403(b)9.
Contributions that you make into your 403(b) plan are always yours although you may be subject to a surrender charge if you terminate an annuity contract within a specified number of years after it was issued. If your employer makes any matching contributions, they may be subject to a vesting schedule similar to the vesting schedules in a 401(k).
403(b) plans offer yet another great way for qualifying workers to plan for retirement through the use of payroll deductions. If you work for a 501(c)3 non-profit agency, church, hospital, or in the public school system, check out this great plan … someday, you’ll be very glad to have the extra retirement income that these plans can provide.