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IRS Announces 2025 Retirement Plan Limits
The Internal Revenue Service (“IRS”) has announced the following dollar limits applicable to tax-qualified plans for 2025: The limit on the maximum amount of elective contributions that a person may make to a 401(k) plan, a 403(b) tax-sheltered annuity, or a 457(b) eligible deferred compensation plan increased from $23,000 to $23,500. The limit on “catch-up contributions” to a 401(k) plan, a…
IRS Issues FAQs Regarding Long-Term Part-Time Employees in 403(b) Plans
The IRS recently issued Notice 2024-73, which provides much-needed guidance on long-term, part-time (“LTPT”) employees in ERISA-governed 403(b) retirement plans. Following passage of the SECURE 2.0 Act, an employee is generally considered a LTPT employee if he or she works at least 500 hours per year for two consecutive years. Among other items, the Notice sets forth the IRS position on the…
How to Maximize 403(b) Rollover Strategies While Still Employed
For many employees in public schools, non-profits, or hospitals, a 403(b) retirement plan is an essential part of their financial future. However, some employees might feel limited by the investment options, high fees, or lack of control within their 403(b) plans. Rolling over your 403(b) while you're still employed could be a game-changing strategy for maximizing your retirement savings.
In this blog, we’ll explore how you can rollover your 403(b) without leaving your job, unlock new opportunities, and optimize your long-term financial strategy.
Why Maximizing Your 403(b) Rollover Matters?
A 403(b) plan allows employees of non-profit organizations and certain tax-exempt institutions to save for retirement on a tax-deferred basis. But as you approach retirement or seek more control over your finances, you might wonder if you can make better use of your funds by rolling them over. The good news is you don't need to wait until you leave your employer to take advantage of a rollover.
Rolling over your 403(b) while employed can unlock access to a broader range of investment options, reduce fees, and provide greater flexibility. This means you can take control of your retirement future without waiting for a job change.
The Basics of 403(b) Rollovers
A 403(b) rollover involves transferring funds from your 403(b) retirement plan into another type of retirement account, usually an IRA. While many people associate rollovers with leaving a job or retiring, there’s another option: in-service distributions.
What Is an In-Service Distribution?
In-service distributions allow you to move money out of your 403(b) plan and into another retirement account—such as an IRA—while still employed. Most plans offer this option once you reach the age of 59½, but it’s important to check with your plan administrator for the specific rules of your 403(b) plan.
Debunking Common Misconceptions
One common misconception is that you must leave your job to access the benefits of a rollover. However, many employees are surprised to learn that they can start managing their retirement funds more actively while still employed through in-service distributions.
Key Benefits of Rolling Over Your 403(b) While Employed
If your plan offers in-service distributions, rolling over your 403(b) can have several benefits:
Tax-Deferred Growth
By rolling over your 403(b) into an IRA, you preserve the tax-deferred status of your retirement savings. This allows your investments to grow without immediate tax liabilities, offering the potential for more substantial long-term growth.
Broader Investment Options
Many 403(b) plans come with limited investment choices, restricting your ability to diversify. By rolling over your 403(b) into an IRA, you gain access to a wider variety of assets, including individual stocks, bonds, and alternative investments.
Lower Fees
Some 403(b) plans come with higher administrative or management fees. These fees can gradually diminish your overall returns over time. By transferring your funds into a lower-cost IRA, you may be able to significantly reduce these fees, improving your net returns.
Increased Control
Unlike a 403(b), which often limits your choices based on the offerings of the plan provider, rolling your funds into an IRA gives you full control over how and where to invest your money. This flexibility allows you to customize your retirement strategy to meet your individual needs.
Eligibility Criteria for Rolling Over Your 403(b) While Still Employed?
Before pursuing a 403(b) rollover, it’s crucial to understand the eligibility rules.
Age Requirements
Most 403(b) plans allow for in-service distributions only after you reach the age of 59½. However, some plans may have different age requirements or restrictions, so it’s essential to verify the rules of your specific plan.
Plan-Specific Rules
Eligibility for rollovers can vary depending on the specific terms of your employer’s plan. Make sure to consult with an financial advisor to confirm that in-service distributions are allowed and to understand the amount of your funds that can be rolled over.
Strategies to Maximize Your 403(b) Rollover
These strategies can help you maximize the benefits of your 403(b) rollover once you are eligible:
A. Rollover to an IRA for Broader Investment Choices
An IRA generally provides a wider range of investment options than a 403(b), including individual stocks, exchange-traded funds (ETFs), and mutual funds. This additional variety can allow for better diversification, which may help you improve your investment outcomes.
B. Consider Partial Rollovers to Diversify Your Portfolio
If you’re hesitant to fully move your 403(b) out of your employer’s plan, a partial rollover could be a middle ground. You can transfer some funds to an IRA while continuing to contribute to your 403(b), balancing the benefits of employer contributions with the increased control and flexibility of an IRA.
C. Focus on Low-Fee Accounts
When selecting a rollover account, focus on low-fee IRAs to minimize costs. Even small differences in fees can lead to significant savings over the years. Look for providers offering low or no annual fees and affordable investment options.
D. Converting a 403(b) to a Roth IRA for Tax-Free Growth
If you're prepared to pay taxes upfront, rolling your 403(b) into a Roth IRA can offer substantial tax advantages. While you'll owe taxes on the rollover amount now, all future growth and withdrawals in retirement will be tax-free, offering substantial long-term advantages.
Potential Pitfalls to Watch Out for When Rolling Over a 403(b)
As beneficial as 403(b) rollovers can be, they also come with potential pitfalls. Here are a few to avoid:
Penalties for Early Withdrawals
Withdrawing funds before reaching the required age or improperly handling the rollover could lead to penalties. Ensure that your funds are transferred directly from one retirement account to another to avoid early withdrawal fees or taxes.
The Risk of Losing Employer Contributions
If your employer matches contributions to your 403(b), rolling over too much of your balance could mean missing out on this free money. Make sure you fully understand the impact of a rollover on any future employer matches.
Tax Implications
Although most rollovers from a 403(b) to a traditional IRA won't result in immediate taxes, converting to a Roth IRA will. Be sure to consider how much tax you’ll owe before deciding on a Roth conversion.
Step-by-Step Process to Roll Over Your 403(b)
Here’s how to complete a 403(b) rollover without incurring penalties:
Contact Your Plan Administrator: Ensure your 403(b) plan allows for in-service distributions and confirm the amount you’re eligible to roll over.
Select a Rollover Account: Decide whether to roll your funds into a traditional IRA, Roth IRA, or another retirement account based on your financial goals.
Transfer Funds: Start a direct transfer to prevent taxes or penalties. This process involves a direct rollover, where the funds had been transfer directly to your new account by your 403(b) provider.
Monitor Your New Account: Once the funds have been transferred, regularly review your investments to ensure they align with your retirement strategy.
A Balanced Approach to Maximize Both Your Current 403(b) and Rollover
If you're still receiving employer contributions, it may be smart to retain part of your funds in your 403(b) while rolling over a portion to an IRA. This balanced approach lets you benefit from employer matches while gaining control and flexibility with the rolled-over funds.
Conclusion
Maximizing your 403(b) rollover while still employed offers a great opportunity to enhance your retirement planning. Whether you’re seeking lower fees, more investment options, or greater flexibility, rolling over your 403(b) can help you achieve these goals. Seeking the guidance of a financial advisor can ensure you don’t miss important details and maximize your benefits.
At PSR Assurance, we specialize in helping clients navigate their retirement options, including 403(b) rollovers. We provide personalized financial advice tailored to your unique financial situation, ensuring that you make informed decisions that benefit your long-term retirement strategy.
Introduction: The Battle of Retirement PlansIn the labyrinth of retirement planning, choosing the right savings vehicle can feel like navigating a minefield. Every option comes with its own set of rules, benefits, and potential pitfalls. That’s why understanding the nuances of different retirement plans is crucial. The choice between a 457 plan and a 403(b) Plan can significantly impact your financial future, so it’s vital to know which path aligns with your long-term goals. Let's take a deep dive into these two popular retirement options to help you decide which is the better fit for your unique circumstances.457 Plan vs. 403(b) Plan: The Key DifferenceWhat is a 457 Plan?Origins and Purpose of the 457 PlanThe 457 plan originated as a retirement savings option for employees of state and local governments, along with certain non-profit organizations. The plan was designed to provide a tax-advantaged way for public employees to save for retirement, especially those who might not have access to other retirement plans. Over the years, its scope has expanded, but its core purpose remains: to offer a flexible, tax-deferred savings opportunity.Who Can Participate in a 457 Plan?Not everyone can hop on the 457 bandwagon. Participation is primarily limited to state and local government employees and select non-profit organizations. This exclusivity means that many people are unaware of the benefits this plan offers unless they’re directly employed in these sectors. If you fall into this category, a 457 plan could be a powerful tool in your retirement arsenal.Key Features That Make 457 Plans UniqueWhat makes the 457 plan stand out from other retirement options? For starters, the withdrawal rules are far more lenient. Unlike many plans that penalize early withdrawals before age 59½, the 457 Plan allows participants to access their funds upon separation from employment, regardless of age, without incurring an early withdrawal penalty. Additionally, the plan often includes high catch-up contribution limits, allowing near-retirees to turbocharge their savings.What is a 403(b) Plan?History of the 403(b) Plan and Its Intended AudienceThe 403(b) Plan, often dubbed the “tax-sheltered annuity,” was introduced as a retirement savings vehicle for employees of public schools, certain non-profits, and religious organizations. It’s a close cousin to the more widely known 401(k), but it’s tailored specifically for the public and non-profit sectors. The 403(b) Plan was designed to provide these employees with a straightforward way to save for retirement, with tax advantages that incentivize consistent contributions.Eligibility Criteria for the 403(b) PlanTo be eligible for a 403(b) Plan, you typically need to work for a public school, a non-profit organization classified under 501(c)(3), or certain religious institutions. The eligibility criteria are broader than those for the 457 plan, which means more individuals can take advantage of the benefits offered by a 403(b).Unique Aspects of the 403(b) PlanWhat sets the 403(b) Plan apart? One of its unique features is the availability of loan provisions, which allow participants to borrow against their retirement savings. This can be a significant advantage if you find yourself in a financial bind and need access to funds. Additionally, the 403(b) often offers a Roth option, allowing you to contribute after-tax dollars and enjoy tax-free withdrawals in retirement.457 Plan vs. 403(b) Plan: The Key DifferencesA Quick Snapshot of the Major DifferencesAt first glance, the 457 Plan and 403(b) Plan might seem quite similar—both are tax-advantaged retirement savings options for public and non-profit sector employees. However, the devil is in the details. The key differences lie in their withdrawal rules, loan provisions, and the types of employees they serve. While the 457 plan offers more flexible early withdrawal options, the 403(b) Plan typically provides a broader range of investment choices and the possibility of loans.Who Benefits More from Each Plan?The answer depends largely on your employment sector and financial goals. If you’re a public sector employee who might need to access your savings before age 59½, the 457 plan lenient withdrawal rules could be a significant advantage. On the other hand, if you value the ability to take out a loan against your retirement savings or prefer the security of a Roth option, the 403(b) Plan might be more suitable.Eligibility Requirements: Are You In or Out?Comparing the Eligibility Criteria for Both PlansEligibility for these plans hinges on your employer type. If you work for a state or local government or a qualifying non-profit, you’re in the 457 Plan’s target audience. Conversely, the 403(b) Plan is available to public school employees, certain non-profit employees, and employees of religious organizations. It’s essential to check with your employer to determine which plan or plans you’re eligible for.Public vs. Private Sector Eligibility ExplainedPublic sector employees, particularly those in education or government, often have access to both plans, providing more flexibility in their retirement planning. Private sector employees, however, might find themselves limited to other plans like the 401(k) unless their employer is a non-profit or otherwise qualifies for the 403(b) Plan.Contribution Limits: How Much Can You Stash Away?Understanding Annual Contribution Limits for 457 PlansThe 457 Plan offers robust contribution limits. For 2024, participants can contribute up to $22,500 annually. Moreover, for those aged 50 and above, there’s a catch-up provision allowing an additional $7,500 per year, enabling them to save more aggressively as they approach retirement.Breaking Down the Contribution Limits for 403(b) PlansThe 403(b) Plan matches the 457 Plan with an annual contribution limit of $22,500, plus a similar catch-up contribution for those over 50. However, the 403(b) Plan also offers a unique 15-year service catch-up provision, which allows long-term employees to contribute an additional $3,000 per year, up to a lifetime limit of $15,000.How Catch-Up Contributions Work for Both PlansCatch-up contributions are a fantastic feature for those who may have started saving late or want to boost their retirement funds as they near retirement. While both plans offer standard catch-up options, the 403(b) Plan’s 15-year service catch-up provides an extra cushion for dedicated long-term employees. Understanding these nuances is key to maximizing your retirement savings.Withdrawal Rules: Can You Access Your Money When You Need It?The Age Factor: When Can You Start Taking Distributions?The 457 Plan shines with its flexibility in withdrawal rules. Participants can begin taking distributions upon separation from employment, regardless of age, without the typical 10% early withdrawal penalty. The 403(b) Plan, however, generally requires you to wait until age 59½ to avoid penalties, aligning more closely with traditional retirement age expectations.Early Withdrawal Penalties and ExceptionsWhile the 457 Plan sidesteps early withdrawal penalties, the 403(b) Plan is not so forgiving. Withdrawals before age 59½ typically incur a 10% penalty, unless exceptions such as financial hardship, disability, or certain qualifying emergencies apply. Knowing these exceptions can help you avoid unnecessary penalties.Required Minimum Distributions (RMDs) for 457 and 403(b) PlansBoth plans require minimum distributions starting at age 73 (beginning January 1, 2023). Failing to take RMDs can result in steep penalties, so it’s crucial to plan accordingly. Each plan has its own rules and calculation methods for RMDs, making it important to understand how they apply to your specific situation.Tax Treatment: The Good, the Bad, and the TaxableTax Benefits of Contributing to a 457 PlanThe 457 Plan allows contributions to be made on a pre-tax basis, reducing your taxable income for the year and letting your investments grow tax-deferred until withdrawal. This can be particularly beneficial for those in higher tax brackets who anticipate being in a lower bracket during retirement.How 403(b) Plan Contributions Affect Your TaxesLike the 457 Plan, contributions to a 403(b) Plan are typically made pre-tax, offering immediate tax savings. However, the availability of a Roth 403(b) option allows for after-tax contributions with tax-free growth, providing flexibility in how you manage your taxable income now and in retirement.Roth Options: Are They Available for Both Plans?While Roth options are common in 403(b) Plans, they’re less prevalent in 457 Plans. A Roth account allows for after-tax contributions, meaning you won’t get an immediate tax break, but qualified withdrawals in retirement are tax-free. This feature can be a game-changer for those who anticipate being in a higher tax bracket in retirement.Investment Options: What Are Your Choices?Understanding the Investment Choices Within a 457 PlanInvestment options in 457 Plans can be somewhat limited, often restricted to mutual funds, annuities, and stable value funds. While these options offer security, they might lack the diversity some investors seek. It's essential to scrutinize your specific plan’s offerings to ensure they align with your risk tolerance and retirement goals.Exploring the Investment Options in a 403(b) Plan403(b) Plans often provide a broader range of investment choices, including mutual funds, annuities, and sometimes even self-directed brokerage options. This flexibility allows you to tailor your investment strategy more precisely to your retirement needs and risk profile.Which Plan Offers Better Diversification?When it comes to diversification, the 403(b) Plan generally has the upper hand due to its wider array of investment options. However, if your 457 Plan offers sufficient choices that align with your strategy, you can still achieve a well-diversified portfolio. The key is to evaluate your options thoroughly and choose the plan that best supports your financial objectives.Loan Provisions: Can You Borrow From Your Future?457 Plan Loan Rules and RestrictionsNot all 457 Plans offer loan provisions, and those that do may have strict guidelines. Typically, loans are only available in cases of hardship, and the amount you can borrow is often capped. It's crucial to understand your plan's specific rules if you think you might need to borrow from your retirement savings.How 403(b) Loans Work and Their AdvantagesMany 403(b) Plans allow for loans, which can be a lifesaver in a financial pinch. However, taking a loan means reducing your retirement savings, and if you fail to repay it, the loan is treated as a distribution, subject to taxes and penalties. Carefully consider the pros and cons before tapping into your retirement funds.Comparing the Flexibility of Loan Provisions in Both PlansIf having access to a loan is a priority for you, the 403(b) Plan is likely the better option, given its more generous loan provisions. However, if you don't foresee needing a loan and prefer other features of the 457 Plan, the difference in loan availability may not be a deciding factor.The Role of Employer ContributionsDo Employers Contribute to 457 Plans?Employer contributions to 457 Plans are less common but not unheard of. When offered, these contributions can significantly boost your retirement savings. However, it’s essential to know if these contributions count towards your annual contribution limit, as this can impact how much you’re able to contribute on your own.Understanding Employer Matching in 403(b) PlansEmployer contributions in 403(b) Plans are more typical and often take the form of matching contributions, which can be a powerful incentive to maximize your savings. Understanding the terms of any matching program is crucial to ensuring you’re getting the most out of your employer’s contributions.The Impact of Employer Contributions on Your Retirement SavingsEmployer contributions can substantially enhance your retirement savings in either plan. The key is to fully understand the terms and leverage these contributions to boost your financial security in retirement.The Pros and Cons of Each Plan: A Comprehensive LookWeighing the Advantages of the 457 PlanThe 457 Plan’s primary strengths lie in its flexible withdrawal rules and high contribution limits. It’s an excellent choice for those who might need access to their funds before age 59½ without penalties. However, its limited investment options and less common employer contributions can be drawbacks.Analyzing the Benefits and Drawbacks of the 403(b) PlanThe 403(b) Plan shines with its wider array of investment options, loan provisions, and potential for employer matching contributions. However, its stricter withdrawal rules and penalties for early distributions can be a disadvantage for those who need early access to their funds.Which Plan Offers the Best Overall Benefits?Ultimately, the best plan for you depends on your specific needs, employment sector, and retirement goals. If flexibility in withdrawals and higher catch-up contributions are your priorities, the 457 Plan may be the better choice. If you prefer a broader range of investment options and the possibility of employer matching, the 403(b) Plan might be more suitable.Real-Life Scenarios: Choosing the Right Plan Based on Your SituationScenario 1: A Mid-Career Educator Evaluating Their OptionsConsider a mid-career public school teacher with access to both a 457 Plan and a 403(b) Plan. If they’re focused on maximizing their savings with employer matching and are comfortable with the 403(b)’s withdrawal rules, they might lean towards the 403(b) Plan. However, if they anticipate needing access to their funds before age 59½, the 457 Plan’s flexibility could be more appealing.Scenario 2: A Government Employee Nearing RetirementA government employee approaching retirement age with access to both plans may benefit more from the 457 plan, especially if they plan to retire early. The ability to withdraw funds without penalties upon separation from service can provide the financial freedom they need as they transition into retirement.Scenario 3: A Non-Profit Worker with Limited Plan ChoicesFor a non-profit worker only eligible for a 403(b) Plan, the decision is simpler. They should focus on maximizing their contributions and taking advantage of any employer matching. They can also explore the Roth option if they expect their tax rate to be higher in retirement.Conclusion: Making the Final DecisionChoosing between a 457 plan and a 403(b) Plan isn’t a one-size-fits-all decision. It requires careful consideration of your employment sector, financial goals, and retirement timeline. Both plans offer unique benefits and potential drawbacks, and the best choice depends on your individual circumstances. By understanding the key differences, you can make an informed decision that aligns with your long-term financial objectives.This comprehensive guide breaks down the key differences between the 457 Plan and 403(b) Plan, providing you with the information needed to make the best choice for your retirement savings. Remember, the right plan is the one that fits your specific needs and helps you achieve your retirement goals.Frequently Asked Questions (FAQs)Do I Need a 401(k) and a 403(b)?Whether you need both a 401(k) and a 403(b) depends on your employment situation and financial goals. If you work for a private sector company and a nonprofit or public sector employer simultaneously, you might have access to both. Having both allows you to diversify your retirement savings and potentially maximize your contributions. However, it's essential to understand each plan's features and how they align with your retirement strategy.What Is a 403(b)(7) Plan?A 403(b)(7) plan is a type of 403(b) retirement account specifically designed to invest in mutual funds. Unlike standard 403(b) plans that may include annuities, a 403(b)(7) account focuses solely on mutual fund investments, allowing for potentially greater growth opportunities depending on market conditions.What Is Another Name for a 403(b)?A 403(b) plan is often referred to as a "tax-sheltered annuity" (TSA) plan. This name reflects the plan's original structure, which was mainly annuity-based, although mutual funds are now commonly included as investment options.Is a 403(b) Considered an Asset?Yes, a 403(b) is considered an asset. It is a retirement savings account that accumulates funds over time, which can be used to support you financially during retirement. The value of the 403(b) is included in your net worth calculation.Can You Transfer a 403(b) to a 401(k)?Yes, you can transfer a 403(b) to a 401(k) if you leave your job at the nonprofit or public sector organization and move to a private sector job that offers a 401(k). However, you need to ensure the receiving 401(k) plan accepts rollovers from a 403(b).
Most state and local governments have a retirement savings plan – but the workers who need them most don’t always take advantage of them.
What is a 403(B)?
A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program.
Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. Contributions to a 403(b) are made for the participating employee by his or her employer. The money that is contributed to the 403(b) comes either from employer contributions, which are called non-elective deferrals, or from employee contributions, called elective deferrals.
Elective deferrals are deducted from the participant’s paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most 403(b) contributions are elective deferrals.
You may contribute 100% of your compensation subject to the elective deferral limit of $16,500 for this year. For individuals age 50+, an additional $5,500 can be contributed for this year. If a 403(b) participant has 15 or more years of service, they may be eligible for an additional “catch-up” provision. A “catch-up” provision of $3,000 is available only if the participant has not contributed on average more than $5,000 per year into a 403(b) account. An averaging calculation must be done to ensure that the option is available. A lifetime limitation of $15,000 applies to this special “catch-up” provision.
⏩ WHEN MAY I WITHDRAW THE MONEY IN MY 403(B)?
Under current law, you may begin withdrawals at any time once you have attained age 59½, and you are required by law to begin making withdrawals once you are 70½. There are important exceptions to the general rules.
If you separate from service with your employer prior to age 59½, but on or after age 55, the law permits you to withdraw money from your 403(b) with no tax penalties or restrictions. If you separate from service prior to age 55 you are permitted restricted access to your money, but you must stretch out the distribution in a way that would systematically liquidate your account over your life expectancy. In other words, the amount you can withdraw each year is restricted. The good news is, once you have attained age 59½ and if you have made systematic withdrawals for at least five years, current law permits you to revoke the previous withdrawal election and have full access to your money.
When you reach age 70½, if you have not already started withdrawing money from your 403(b), you must generally begin doing so at that time. There are exceptions. If you are still working for an eligible employer you may defer making any withdrawals until you actually retire.
If you die before you have begun making any withdrawals from your 403(b), your surviving spouse (if any) may become successor owner of your 403(b). He or she will have the same rights as you had except that no further contributions may be made. If your beneficiary is someone other than your spouse, he or she may take all the money at once or may stretch out the distribution over a period of years.
The distribution rules are complicated and it is important to comply with them to avoid tax penalties. Your 403(b) company or agent can provide you with the information you will need. There is a reason for the withdrawal restrictions on your 403(b). When Congress enacted the law creating 403(b) plans, the intent was for you to use your 403(b) as a retirement savings vehicle, not as a short term tax-sheltered savings account.
⏩ MAY I BORROW AGAINST THE MONEY IN MY 403(B) FOR EMERGENCIES?
Yes. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) makes it possible for you to borrow from your 403(b).
Most fixed dollar 403(b) contracts have a loan feature, as do some variable annuities. Loan provisions vary from company to company. The law permits you to borrow 100% of the withdrawal value of your 403(b) if the loan does not exceed $10,000. If the amount borrowed exceeds $10,000, the maximum loan is 50% of the cash value of your 403(b) not to exceed $50,000.
By law, the loan must be repaid in at least quarterly installments of principal and interest over a period not to exceed five years, with one exception: if the purpose of the loan is to acquire a dwelling intended to be your principal residence within a reasonable time, the repayment period may be extended beyond five years with the agreement of the 403(b) company.
When making a loan, first check to see what interest rate the company will charge you on the borrowed amount. Then, find out what interest rate will be credited on the accumulation value in your account set aside as collateral for the loan. You should take these things into consideration in deciding whether a TEFRA loan is better for your circumstances than borrowing from a bank or credit union.
If you have any questions or want to learn more, click here.
What is a 403(B)?
A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program.
Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. Contributions to a 403(b) are made for the participating employee by his or her employer. The money that is contributed to the 403(b) comes either from employer contributions, which are called non-elective deferrals, or from employee contributions, called elective deferrals.
Elective deferrals are deducted from the participant’s paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most 403(b) contributions are elective deferrals.
You may contribute 100% of your compensation subject to the elective deferral limit of $16,500 for this year. For individuals age 50+, an additional $5,500 can be contributed for this year. If a 403(b) participant has 15 or more years of service, they may be eligible for an additional “catch-up” provision. A “catch-up” provision of $3,000 is available only if the participant has not contributed on average more than $5,000 per year into a 403(b) account. An averaging calculation must be done to ensure that the option is available. A lifetime limitation of $15,000 applies to this special “catch-up” provision.
⏩ WHEN MAY I WITHDRAW THE MONEY IN MY 403(B)?
Under current law, you may begin withdrawals at any time once you have attained age 59½, and you are required by law to begin making withdrawals once you are 70½. There are important exceptions to the general rules.
If you separate from service with your employer prior to age 59½, but on or after age 55, the law permits you to withdraw money from your 403(b) with no tax penalties or restrictions. If you separate from service prior to age 55 you are permitted restricted access to your money, but you must stretch out the distribution in a way that would systematically liquidate your account over your life expectancy. In other words, the amount you can withdraw each year is restricted. The good news is, once you have attained age 59½ and if you have made systematic withdrawals for at least five years, current law permits you to revoke the previous withdrawal election and have full access to your money.
When you reach age 70½, if you have not already started withdrawing money from your 403(b), you must generally begin doing so at that time. There are exceptions. If you are still working for an eligible employer you may defer making any withdrawals until you actually retire.
If you die before you have begun making any withdrawals from your 403(b), your surviving spouse (if any) may become successor owner of your 403(b). He or she will have the same rights as you had except that no further contributions may be made. If your beneficiary is someone other than your spouse, he or she may take all the money at once or may stretch out the distribution over a period of years.
The distribution rules are complicated and it is important to comply with them to avoid tax penalties. Your 403(b) company or agent can provide you with the information you will need. There is a reason for the withdrawal restrictions on your 403(b). When Congress enacted the law creating 403(b) plans, the intent was for you to use your 403(b) as a retirement savings vehicle, not as a short term tax-sheltered savings account.
⏩ MAY I BORROW AGAINST THE MONEY IN MY 403(B) FOR EMERGENCIES?
Yes. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) makes it possible for you to borrow from your 403(b).
Most fixed dollar 403(b) contracts have a loan feature, as do some variable annuities. Loan provisions vary from company to company. The law permits you to borrow 100% of the withdrawal value of your 403(b) if the loan does not exceed $10,000. If the amount borrowed exceeds $10,000, the maximum loan is 50% of the cash value of your 403(b) not to exceed $50,000.
By law, the loan must be repaid in at least quarterly installments of principal and interest over a period not to exceed five years, with one exception: if the purpose of the loan is to acquire a dwelling intended to be your principal residence within a reasonable time, the repayment period may be extended beyond five years with the agreement of the 403(b) company.
When making a loan, first check to see what interest rate the company will charge you on the borrowed amount. Then, find out what interest rate will be credited on the accumulation value in your account set aside as collateral for the loan. You should take these things into consideration in deciding whether a TEFRA loan is better for your circumstances than borrowing from a bank or credit union.
If you have any questions or want to learn more, click here.
What is a 403(B)?
A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program.
Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. Contributions to a 403(b) are made for the participating employee by his or her employer. The money that is contributed to the 403(b) comes either from employer contributions, which are called non-elective deferrals, or from employee contributions, called elective deferrals.
Elective deferrals are deducted from the participant’s paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most 403(b) contributions are elective deferrals.
You may contribute 100% of your compensation subject to the elective deferral limit of $16,500 for this year. For individuals age 50+, an additional $5,500 can be contributed for this year. If a 403(b) participant has 15 or more years of service, they may be eligible for an additional “catch-up” provision. A “catch-up” provision of $3,000 is available only if the participant has not contributed on average more than $5,000 per year into a 403(b) account. An averaging calculation must be done to ensure that the option is available. A lifetime limitation of $15,000 applies to this special “catch-up” provision.
⏩ WHEN MAY I WITHDRAW THE MONEY IN MY 403(B)?
Under current law, you may begin withdrawals at any time once you have attained age 59½, and you are required by law to begin making withdrawals once you are 70½. There are important exceptions to the general rules.
If you separate from service with your employer prior to age 59½, but on or after age 55, the law permits you to withdraw money from your 403(b) with no tax penalties or restrictions. If you separate from service prior to age 55 you are permitted restricted access to your money, but you must stretch out the distribution in a way that would systematically liquidate your account over your life expectancy. In other words, the amount you can withdraw each year is restricted. The good news is, once you have attained age 59½ and if you have made systematic withdrawals for at least five years, current law permits you to revoke the previous withdrawal election and have full access to your money.
When you reach age 70½, if you have not already started withdrawing money from your 403(b), you must generally begin doing so at that time. There are exceptions. If you are still working for an eligible employer you may defer making any withdrawals until you actually retire.
If you die before you have begun making any withdrawals from your 403(b), your surviving spouse (if any) may become successor owner of your 403(b). He or she will have the same rights as you had except that no further contributions may be made. If your beneficiary is someone other than your spouse, he or she may take all the money at once or may stretch out the distribution over a period of years.
The distribution rules are complicated and it is important to comply with them to avoid tax penalties. Your 403(b) company or agent can provide you with the information you will need. There is a reason for the withdrawal restrictions on your 403(b). When Congress enacted the law creating 403(b) plans, the intent was for you to use your 403(b) as a retirement savings vehicle, not as a short term tax-sheltered savings account.
⏩ MAY I BORROW AGAINST THE MONEY IN MY 403(B) FOR EMERGENCIES?
Yes. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) makes it possible for you to borrow from your 403(b).
Most fixed dollar 403(b) contracts have a loan feature, as do some variable annuities. Loan provisions vary from company to company. The law permits you to borrow 100% of the withdrawal value of your 403(b) if the loan does not exceed $10,000. If the amount borrowed exceeds $10,000, the maximum loan is 50% of the cash value of your 403(b) not to exceed $50,000.
By law, the loan must be repaid in at least quarterly installments of principal and interest over a period not to exceed five years, with one exception: if the purpose of the loan is to acquire a dwelling intended to be your principal residence within a reasonable time, the repayment period may be extended beyond five years with the agreement of the 403(b) company.
When making a loan, first check to see what interest rate the company will charge you on the borrowed amount. Then, find out what interest rate will be credited on the accumulation value in your account set aside as collateral for the loan. You should take these things into consideration in deciding whether a TEFRA loan is better for your circumstances than borrowing from a bank or credit union.
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