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How much can be contributed to a 403(b)?

For 2014 employees can contribute $17,500 in regular contributions. The IRS refers to this as elective deferrals. A Participant age 50 or older at any time during the year can contribute an additional $5,500. For those with employer matches or other employer contributions, limit is $52,000 or 100% of compensation (whichever is less). The participant is still limited to the employee elective deferral limit ($17,500 for 2014). An employer can add up to another $34,500.

15 Years of Service Provision

Employees with 15 years or more of service with an employer and an annual average contribution of less than $5,000 per year, are eligible to contribute an additional $3,000 per year up to a lifetime maximum catch-up of $15,000.

Note: For participants eligible for both the Age 50 Catch-up and the 15 Years of Service provision, the IRS will apply contributions above the 2014 limit of $17,500 first to the 15 Years of Service provision. For example, if an employee eligible for both catch-ups contributed $21,000 during the year 2014, $17,500 would count toward the regular contribution limit for 2014; $3,000 would count toward the 15 Years of Service provision; and $500 would count toward the Age 50 Catch-up. If this was the first contribution this participant had made toward the 15 Years of Service provision, the amount they would be able to contribute to this catch-up in the future would be reduced from $15,000 (the lifetime maximum) to $12,000 ($15,000 less the $3,000 contributed in 2014).

Can participation be restricted?

Yes. Working less than 20 hours a week are among the reasons an employee can be excluded from participation. See Univeral Availability information from the IRS for details.

What investment products are available in a 403(b) plan?

403(b) money can be invested in a fixed annuity; and/or variable annuity; and/or a mutual fund (see below for description of each).

Fixed Annuities

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.

Variable Annuities

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).

Mutual Funds

A mutual fund is an investment that pools money from many participants and invests in stocks, bonds, short-term money-market instruments, or some combination of the three. The combined holdings of stocks, bonds, or other assets that the fund owns are known as its portfolio. Each investor in the fund owns shares, which represent a part of these holdings. There are two kinds of mutual funds: loaded mutual funds and no-load mutual funds. A load is a commission the investor must pay in order to purchase/sell that fund. All mutual funds have operating costs. Mutual funds are securities regulated by the SEC but are not guaranteed or insured by the FDIC or any other government agency.

What companies/vendors can I invest with?

Ask your employer for a list of available investment companies (this is often known as a vendor list). You are only permitted to invest with a company offered through your employer. Unhappy with your list of offerings? See our story about getting better choices.

What should I know before opening a 403(b)?

Fees, operating rules, and investment objectives can vary greatly among vendors and across investments. Therefore, it is important to understand all of these before you begin contributing to any investment. Additionally, some investments impose surrender charges or restrictions on withdrawals. Find out if there are surrender charges or restrictions on withdrawals before investing.

All mutual funds and variable annuities are required to produce a document called a prospectus, which details specific information about investment cost, objective, risk, performance, and operating rules. Ask to see the prospectus before contributing to a variable annuity or a mutual fund. Fixed-annuity products do not have a prospectus. Instead, they have a contract that details operation of the annuity. Ask to see the contract before investing in a fixed annuity.

For more information on general investing principles and terms, see the Investment Reference section. For more information on the impact of investment fees on return, estimation of future savings growth, impact on paycheck of a 403(b) contribution, and exploration of various distribution scenarios see the Calculators section.

What does it cost to invest in a 403(b)?

Fees vary greatly among vendors and across investments; what follows are general guidelines.

Fixed Annuities

There is no separate fee for a fixed annuity. Similar to the way in which a bank makes money on a certificate of deposit, annuity fees are built into the product. For example, an annuity company may believe it can earn X percent on an investment, so it will pay an investor Y percent. The company makes its money on the difference, or spread. Generally this spread is between 1 and 2 percent annually. For specific information on fees, consult the contract provided by the company offering the fixed-annuity before you begin making contributions.

Variable Annuities

Variable annuities charge on average 2.25 percent a year, according to fund tracker Morningstar Inc. For specific information on fees, consult the prospectus for the variable annuity before you begin making contributions.

Mutual Funds

Mutual funds charge on average 1.4 percent a year according to fund tracker Morningstar Inc. For specific information on fees, consult the prospectus of the mutual fund before you begin making contributions.

Do I need an agent or advisor to start a 403(b)?

No. You are free to invest on your own. You may also use the services of a vendor representative or independent financial advisor. Financial representatives can provide valuable services to their clients. These services can include retirement planning, information about state retirement plans, and analysis of other financial needs. Annuity and variable-annuity products are often sold by vendor representatives who are also referred to as agents. All financial professionals charge a fee for their services. In order to determine the value of the service, it is important to know exactly what services are being provided and exactly what fees are being charged. The 403(b)wise Advisor Directory is a valuable resource for finding advisors that adhere to the 403(b)wise standards and will work in the best interest of their clients.

Will participation in a 403(b) plan reduce Social Security benefits?

No. Salary reduction contributions to a 403(b) reduce taxable compensation for federal (and in most instances, state) income tax purposes only. Those contributions do not reduce wages for the purpose of determining FICA taxes or determining social security benefits.

Will participation in a defined benefit plan (state pension plan such as CalSTRS in California or TRS in Texas) affect one's ability to contribute the maximum elective deferral limit to a 403(b) plan?

No. The elective deferral limit is a taxpayer limit, meaning that your maximum contribution to all plans cannot exceed the annual limit. However, your mandatory contribution to the state defined benefit plan is not considered an elective deferral, so it doesn't reduce your annual limit. Therefore, you are able to participate in your state's defined benefit plan and contribute the maximum allowable to your 403(b) plan.

Note: If your employer offers both a 403(b) and a 457(b), you are eligible to contribute the maximum allowable to each plan.

Can I change companies/vendors?

Yes, the IRS allows participants to change from one employer offered vendor to another employer offered vendor. Some employers limit the number of changes permitted each year. Contact your employer for information specific to your plan.

Notes: Employees generally are permitted to move money from one employer offered vendor to another employer offered vendor. Keep in mind that some 403(b) vendors — usually insurance companies — charge stiff exit penalties, which typically last from 5 to 15 years with the charge corresponding to the number of years the penalty lasts. For example, if a vendor imposes a surrender charge for 7 years, then the exit penalty will often be 7 percent of balance. These charges usually decline by one percent each year. This means that money contributed 5 years ago might be subject to a 2 percent penalty, while money contributed 7 years ago may no longer be subject to penalty. Unfortunately, many vendors impose rolling surrender charges. This means each new contribution is locked into a new surrender charge period.

Participants saddled with surrender charges have three choices: (a) bite the bullet, pay the penalty, and move the money; (b) transfer only money that has passed the penalty threshold. As new money passes the penalty phase, transfer it; or (c) leave the money where it is. Be aware of all surrender charges before initiating any type of transfer.

Can I change the amount I am contributing?

Yes. Some employers limit the number of changes permitted each year. Contact your employer for information specific to your plan.

Can I stop contributing?

Yes. Contact your employer for information on how to stop contributions.

How long after my 403(b) contribution is deducted from my paycheck should it take to be credited to my 403(b) account?

According to new IRS regulations, transfers must be made within an administratively feasible period, which is considered to be within 15 business days following the month in which these amounts would have been paid to the participant. Translation: the maximum time it should take is 45 days, however, employers can and should complete this process much quicker. It is not uncommon for employers to complete this process the same day that paychecks are issued.

When am I eligible for a distribution from my 403(b)?

If you withdraw assets prior to age 59-1/2, the IRS will impose a 10 percent penalty tax, in addition to the normal tax consequences, unless you meet one of the following criteria:

  • Attain age 59-1/2
  • Separate from service in or after the year in which you reach age 55
  • Part of a series of substantially equal periodic payments for your life or the joint lives of you and your designated beneficiary
  • Hardship
  • Disability
  • Death
  • Made due to an IRS levy upon your participant account
  • Paid to an alternative payee under a qualified domestic relations order
  • Is a qualified reservist distribution as defined under the Pension Protection Act of 2006
  • Is a payment of qualified medical expenses greater than 7.2% of your adjusted gross income

Note that withdrawals will be taxed as ordinary income. See information on Loans, Hardship Withdrawal, Changing Employers, Becoming Disabled, Divorce, Death, and Retirement for more information on accessing 403(b) money.

When must I withdraw money from my 403(b)?

Generally, you must begin to take withdrawals from your 403(b) no later than April 1 of the year following the year in which you turn age 70-1/2. If you are still working, you can delay withdrawal from your 403(b) until April 1 following the year in which you retire.

Can I borrow money from my 403(b)?

Yes, but not all providers permit loans from 403(b) accounts. Contact your provider for availability. Plan loans are convenient, but they are not always the right solution. Consider both the positive and negative repercussions to determine if a plan loan is right for you. And, always compare the overall cost of a plan loan with other sources of funds. The true cost of the loan is more then just interest paid; it also includes the lost interest earned and/or growth from market returns.

If you do choose to take out a loan, here is what you need to know. In order to allow temporary access to your 403(b) account, the Internal Revenue Service (IRS) permits loans. There are, however, some limits on the amount. Generally, the loan cannot exceed the smaller of: $50,000, or one-half of your account balance (though if your account balance is less than $20,000 you may borrow up to $10,000 if you have that much in your account).

In applying these limits, all of your 403(b) accounts must be combined and aggregrated with any loans from other retirement plans you might have, such as a 401(k).

Loans must be repaid by making repayments of principal and interest at least quarterly. Unless the loan is made to acquire your principal residence, it must be repaid within five years.

Failure to make scheduled loan repayments will cause the outstanding loan balance to be included in your gross income and subject to the federal 10% early distribution penalty. Additionally, such a loan default may impair your ability to make loans against your 403(b) account in the future.

Loans will also affect the amount you ultimately accumulate for retirement. Loans are required to charge interest. The lender keeps those amounts that you pay in interest, so interest payments will not be a part of your retirement savings. Therefore, loans should be used only when absolutely necessary.

May hardship withdrawals be made from a 403(b)?

Hardship withdrawals are permitted from a 403(b) account if the employee is under severe financial distress. The employee must have no other resources available to alleviate the stress, such as selling assets or obtaining a loan from a financial institution. Hardship withdrawals may be made for:

  • Un-reimbursed medical expenses of the employee or his/her spouse and dependents
  • Down payment on primary residence
  • Tuition and fees for higher education needs, only for the next 12 months
  • Eviction or foreclosure on your primary residence
  • You may only withdraw the amount that you need to meet your hardship, plus an amount to cover any taxes that apply. Hardship withdrawals can only be taken from salary reduction contributions, not earnings. Your employer will require proof of hardship prior to approving the withdrawal, and will automatically suspend contributions, per IRS guidelines, to your 403(b) and, if applicable, your 457(b) account for six months.

What happens to my 403(b) if I leave my employer?

  • Assets can be transferred to your new employer's defined contribution plan, if permitted by that plan. Check with your new employer for details.
  • Assets may be moved to a Rollover Individual Retirement Account (IRA). This will permit the money to continue to grow tax deferred. Check with the institution currently holding the assets and the institution you wish to transfer to for more details.
  • You can leave the money in the plan and continue to enjoy the tax-deferred growth.
  • You can take a lump sum distribution. If you are not age 59-1/2, early withdrawal penalties and significant tax consequences may occur.

What happens to my 403(b) if I become disabled?

Withdrawal of 403(b) money is permitted in cases of disability, as defined by the IRS. Consult your vendor or a tax professional for more details.

What happens to my 403(b) in the event of a divorce?

Some or all of the balance in your 403(b) account may be transferred. Distribution to an alternate payee will be permitted if it is made pursuant to a qualified domestic relations order (QDRO). This is a decree, judgment, or order that meets the qualification requirements of the Internal Revenue Code. Those requirements include the following:

  • The order must have been issued under a state's community property or other domestic relations law.
  • It must relate to the provision of alimony, child support, or the property rights of a spouse, former spouse, child, or other dependent (alternate payee).
  • It must assign to the alternate payee the right to receive all or a portion of the participant's plan benefits.
  • It must clearly specify (1) the names and addresses of each alternate payee, (2) the amount or percentage of the participant's benefit to be paid to each alternate payee, (3) the period of time over which the order applies, and (4) each plan to which the order applies.
  • If a distribution is made to a spouse or former spouse under a QDRO, the distribution may be rolled into a qualified plan or IRA that the spouse or former spouse has. Distribution to any other alternate payee is not eligible for rollover. It is highly recommended that individuals seek the counsel of a qualified attorney in the event of divorce. It may also be necessary to speak with a tax or financial professional. Your vendor should also be able to provide information. Participants should review beneficiary designations annually and update as necessary through the 403(b) provider.

What happens to my 403(b) in the event of death?

Death benefits are paid to any listed beneficiaries. How the proceeds are distributed depends upon the age of the participant upon death. Participants should review beneficiary designations annually and update as necessary through the 403(b) provider.

What happens to my 403(b) at retirement?

You are free to begin penalty-free withdrawals upon retirement (assumed to be in or after the year in which you reach age 55). Investment contracts may permit you to take withdrawals without the imposition of contractual surrender charges at retirement. Please refer to earlier question "When am I eligible for a distribution from my 403(b)?" for information regarding IRS penalties.

Note that withdrawals will be taxed as ordinary income.

Can I purchase pension-service credit with 403(b) dollars?

Most state pensions permit the purchase of pension-credit with 403(b) dollars. Contact your state pension plan for specific information relevant to your plan.

Can I contribute to a 403(b) and a 457(b)?

Yes. You are eligible to contribute the maximum allowable to each plan, if both plans are offered by your employer.

How is a 403(b) different from a 457(b)?

The plans are similar in that pre-tax contributions are made on behalf of participants and the account grows tax-deferred until withdrawn. Differences between the plans include different distribution rules, utilizing catch-up provisions and withdrawal requests while under financial distress.

403(b) assets may be withdrawn beginning at age 59-1/2 while 457(b) assets may be withdrawn upon separation of service with your employer.

403(b) plans offer two catch-up provisions that may be used during the same calendar year, if the employee is eligible. While the 457(b) plan offers two catch-up provisions only one, of the two, can be used during a calendar year, if the employee is eligible.

Withdrawals requested under financial distress are subject to different rules for eligibility. The 457(b) plan typically has stricter requirements than the 403(b) plan.

Can I transfer 403(b) money to a 457(b)?

You are permitted to transfer 403(b) money from a previous employer.

How is a 403(b) different from a 401(k)?

The most important difference for public employees to know is that a 401(k) is a tax-deferred retirement plan for private sector employees, while the 403(b) is a tax-deferred retirement plan for employees of educational institutions and certain non-profit organizations.

How is a 403(b) different from a 401(a)?

The main difference between a 401(a) and a 403(b) is eligibility. A 401(a) can be established just for administrative staff, or even as narrowly defined as for the cafeteria workers only.

What is a Roth 403(b)?

Similar to the Roth IRA, the Roth 403(b) allows individuals to contribute after-tax dollars to an account that will grow tax free. Withdrawal of contributions will not be taxed. Employees have the option of directing 403(b) contributions to a regular 403(b), a Roth 403(b), or some combination of the two plans. Contributions to both plans cannot exceed the year's total contribution limit for one plan. Not all employers offer a Roth 403(b), nor are they required to do so.

What about distribution requirements for 403(b) money contributed prior to December 31, 1986?

403(b) account balances that existed on December 31, 1986 are not subject to the age 70-1/2 distribution requirement. However, any earnings on that balance are. Distribution from the 12/31/86 balance needs to start at age 75. This requirement is not found in the Internal Revenue Code, but rather in a letter ruling. Also, any distributions in excess of required distributions are deemed to reduce the 12/31/86 balance. So, if any money has been taken out of the 403(b) account other than those that are required (such as a partial withdrawal or a deemed distribution), the 12/31/86 balance may be less than anticipated. For your specific situation it's recommended that you consult a professional tax advisor.

Can I set up a 403(b) on my own?

No. A 403(b) contribution must be made through a salary reduction agreement with an employer.

Which ministers are eligible to contribute to a 403(b)?

The following information is excerpted from IRS Publication 571:

  • Ministers employed by section 501(c)(3) organizations.
  • Self-employed ministers. A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer. If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit.
  • Ministers (chaplains) who meet both of the following requirements.
    1. They are employed by organizations that are not section 501(c)(3) organizations.
    2. They function as ministers in their day-to-day professional responsibilities with their employers.

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