YOU HAVE FOUND OUR OLD WEB SITE. BE SURE TO CHECK OUT OUR NEW AND IMPROVED SITE!     10 Facts on 403(b)s     Who is eligible to contribute to a 403(b)? Employees of public schools and certain tax-exempt organizations — as determined by Section 501(c)(3) of the Internal Revenue Code — can participate in a 403(b) plan.   A qualified employer, in the eyes of the IRS, is an organization that is "organized and operated exclusively for religious, charitable, scientific, public-safety testing, literary, or educational purposes." These types of institutions include K-12 public schools, colleges, universities, hospitals, libraries, philanthropic organizations, and churches.   For more information see: IRS Publication 571 which covers the 403(b) retirement plan. This document can also be obtained by calling 1-800-829-3676.   What investment options are available to 403(b) participants? Unlike the 401(k), 403(b) participants cannot invest in individual stocks. Instead, their choices are:   1. Annuity and variable annuity contracts with insurance companies.   2. A custodial account made up of mutual funds. This is known as a 403(b)(7).   3. Retirement income accounts for churches.     How does a 403(b) work? Participants set aside money on a pre-tax basis through a salary reduction agreement with their employer. The money is then directed to a financial institution approved by the employer. The money grows tax-deferred until retirement. It is taxed as ordinary income when withdrawn.   Are 403(b) participants limited to the vendors offered by their employers? Yes and no. How's that for an answer? Generally, 403(b) participants can only contribute to the vendors offered or sponsored by their employers. In many cases, especially at K-12 schools, these choices are really no choice at all.   It's not uncommon for teachers to be limited to annuity products, with no direct access to mutual funds. Why should this matter? Financial planners are nearly unanimous in their aversion to annuity products within retirement plans. In addition to the higher fees, financial planners argue that it is redundant to put a tax-deferred investment (an annuity) into a tax-deferred plan — a 403(b). Furthermore, many annuity products contain dubious exit clauses and penalties.   If you don't like your employer's offerings, there are several courses of action. The first is a frontal assault. Simply ask your employer to begin offering better choices. Enlist co-workers, and point out the differences in fees and performance. Back it up with Wise research.   If that doesn't work, 403(b) participants can perform something called an IRS Revenue Ruling 90-24 "asset transfer" into the financial institution of their choice (Fidelity, Janus, TIAA-CREF, Vanguard, etc.). The utmost caution is urged with this course of action. In theory, an asset transfer should be as simple as transferring an IRA from one financial institution to another. In practice, it rarely is. One problem is that most annuity investments contain stiff penalties for early withdrawal. And, it's not uncommon for these charges to be in place for seven years. What is a Wise investor to do? Transfer only money that has been invested past the penalty phase. As new money passes the penalty threshold, transfer it (see: Transfer 403(b) Money ).   A third, decidedly Wise course of action has emerged that avoids exit fees and penalty phases. From your employer's list of approved vendors, find a financial institution offering a money-market account. Direct your 403(b) money first into this money-market account (of an approved vendor). Then periodically (every three to six months) perform a 90-24 asset transfer (as described above) from the money-market account of the approved vendor to the financial institution of your choice (Fidelity, Janus, TIAA-CREF, Vanguard, etc.).   Typically, money-market accounts charge few, if any, surrender fees — so, you don't have to worry about penalties. Of course, there may be exceptions and limitations. The financial institution you wish to transfer your 403(b) money into should be able to provide guidance on this. While this route takes time and paperwork, it does allow you to invest in the financial institutions of your choice without the worry of penalty.   How much can be contributed annually to a 403(b)? For 2004, workers are able to contribute the smaller of:   1. the new elective deferral limit of $13,000 (going up to $14,000 in 2005), or   2. up to 100% of includable compensation (must be less than the elective deferral limit), or   3. for those with employer matches or other employer contributions, limits are $41,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit ($13,000 for 2004). An employer can add up to another $28,000.   4. in addition, if you are 50 or older at any time during 2004, you may contribute an additional $3,000.   Note: There is a provision of the Internal Revenue Code that temporarily increases the elective deferral limit for those eligible employees. This increase is known as the 15-year-rule. This special provision increases your elective deferral limit by as much as $3,000 more than the current $13,000 limit (as of 2004). To qualify you must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and you cannot have contributed more than an average of $5,000 in previous years. The increase in your elective deferral limit cannot exceed $3,000 per year under this provision, up to a $15,000 lifetime maximum. If you have 15 or more years of service with your employer, it is highly recommended that you consult with a tax professional concerning the limits on your contributions.   Contribution Calculators Visit our ResearchWise section for a complete list of powerful 403(b) and investment fee calculators.   Why is the 403(b) often called a TSA or TDA? When the 403(b) was created in 1958, participants could only invest in annuity products, so the name Tax-Sheltered Annuity (TSA) or Tax-Deferred Annuity (TDA) took root. Despite the fact that Congress granted 403(b) participants mutual fund privileges in 1974, the TSA/TDA name remains very common today.   Can a 403(b) be rolled into an IRA? Yes. This can occur when the participant:   Separates from service (job change)   Retires   Becomes disabled   Dies     Note: As of January 1, 2002, an IRA can be rolled into a 403(b). One word of caution on IRAs. While the IRA has more investment flexibility (stocks), it does have a few drawbacks. Unlike some investments in a 403(b), you can't borrow money from an IRA. Plus, asset protection (from creditors, lawsuits, etc.) with an IRA is not as strong in some states. If you're satisfied with your current 403(b) plan, the most Wise course of action may be to just leave it alone.   What are the options for a 403(b) when switching jobs?   1. Move the money into your new employer's 403(b) plan. (Note, as of 2002 a 403(b) can be rolled into a 401(k) and vice versa. Not all plans allow such transfers, so check with your employer and plan provider.)   2. Roll it into an IRA as mentioned above.   3. Leave it where it is, especially if you like your investment choices. If the balance is below $5,000 some employers require you to move the money. Check with your employer.   4. Take a lump sum payment. Beware! This is not Wise at all. This will trigger all kinds of fees and penalties, and worse, ridicule and scorn from your Wise friends.     When can 403(b) money be accessed without penalty? Generally, penalty-free distribution from a 403(b) cannot occur until the participant:   Reaches age 59 1/2   Separates from service in the year turning 55 (and must be retired)   Retire before age 55 — eligible for Substantially Equal Periodic Payments (SEPP). Participants who have retired early (before age 55), but want access to their 403(b) without penalty can do so using SEPP. This provision requires that you take a series of substantially equal periodic payments. The key is that once you start these payments they must continue for five years or until you reach 59 1/2, whichever takes longer. If you start at age 58 you must continue until you are 63 (minimum 5 years).   Becomes disabled   Through a loan (some investment companies allow this, some don't)   Suffers financial hardship   Dies     Note: Consulting a tax professional before accessing 403(b) money is highly recommended.   Where can I get more 403(b) answers? See our FAQ section and our 403(b)/457(b) Discussion Board.     Home | Disclaimer | © 2001-2004 bWise Guys, LLC. All rights reserved.				Get Really Wise The 403(b) Wise Guide