403b Plan Advantages, Details, and Disadvantages
403b Plans | How they Work, and what you Need to Know
403b plans are retirement savings plans that allow you to make annual dollar contributions (just like 401k plans) and let them grow tax-deferred up until you withdraw them (upon retirement). Note the fact that 403b plans allow for pre-tax contributions 403b plans are also known as tax-deferred annuities. 403b Plans are engineered for employees of tax-exempt organizations such as:
- High schools, colleges & universities
- Other social & public welfare charities
Since your contributions towards a 403b plan come out of your GROSS WAGE, this means you will be lowering your current taxable income by the amount of the contribution. This means you will be paying lower taxes NOW!
Advantages of 403b Plans - As mentioned above, your lower your current taxable income by contributing towards a 403b plan. This also allows your contributions to grow tax-deferred up until withdrawal. All the years of compounding interest will surely add up! - When you retire, chances are higher that you will be in a lower tax bracket (because you will have quit your job). Therefore, apart from lowering your current taxable income, you also lower the taxes you will pay upon retirement (and maturity of your 403b plan). - The 403b contributions are automatically deducted from your paycheck, therefore you have no worries about the administration of your contributions. - 403b plans allow you to choose where your money is invested in.
403b Plan Contributions
Generally, contributions to an employee's 403(b) account are limited to the lesser of:
- The limit on annual additions, or
- The elective deferral limit
Several contribution limits apply to a 403(b) plan. A plan that includes both employer contributions and employee elective deferrals is subject to both the elective deferral limit, and the limit on annual additions. For the 2009 year, the total of employer and employee contributions (including the 15-year catch-up discussed below)
The limit on elective deferrals, the most that can be contributed to a 403(b) account through employee elective deferrals by means of a salary reduction agreement is $16,500 for 2009.
If permitted by the 403(b) plan, an employee that has at least 15 years of service with a public school system, hospital, home health service agency, health and welfare service agency, church, or convention or association of churches (or associated organization), his or her 403(b) elective deferral limit is increased by the lesser of:
2. $15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule, or
3. $5,000 times the number of the employee's years of service for the organization, minus the total elective deferrals made for earlier years
Where the 403(b) Can Be Invested
403(b) money can be invested in a fixed annuity; and/or variable annuity that has subaccounts or Mutual Funds
Fixed annuities operate much like certificates of deposit but are not insured by the Federal Deposit Insurance Company (FDIC). Generally, investors are given two interest rates: the current rate and the guaranteed rate. The current rate is the return that the insurance company promises to pay for a set period of time, typically between one and five years. The guaranteed rate, usually lower, is the minimum rate that investors will receive after the current rate expires, regardless of market conditions.
A variable annuity offers a range of investment options, typically mutual funds that invest in stocks, bonds, short-term money-market instruments, or some combination of the three. These investments options are referred to as the subaccount. The value of the investment will vary depending on the performance of the investments in the subaccount. There is usually a death benefit that will pay a beneficiary the greater of the account value or a guaranteed minimum amount, such as total purchase payments. Variable annuities are securities regulated by the Securities and Exchange Commission (SEC).
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