What You Need to Know About 403(b) Plans
A 403(b) plan is an employer-sponsored retirement plan for certain employees of public schools, tax-exempt (501(c)(3)) organizations, and churches. The employer can purchase annuity contracts for eligible employees, or establish custodial accounts to be invested in mutual funds or other investments. In the case of annuity contracts, a 403(b) plan is sometimes referred to as a tax-sheltered annuity (TSA) plan. (Church plans are subject to several special rules not covered here.) HOW DOES A 403(B) PLAN WORK? Depending on the specific type of 403(b) plan, contributions may be made by the employee, the employer, or both the employee and employer. Many 403(b) plans are similar to 401(k) plans: you elect either to receive cash payments (wages) from your employer immediately, or to defer receipt of all or part of that income to your 403(b) account. The amount you defer (called an “elective deferral”) can be either pretax or, if your plan permits, after-tax Roth contributions. Employer contributions, if made, may be a fixed percentage of your compensation, or may match a specified percentage of your contribution, or may be discretionary on the part of the employer. One unique characteristic of 403(b) plans is that your employer is allowed to make contributions to your account for up to five years after you terminate employment. WHAT ARE THE CONTRIBUTION LIMITS? You can defer up to $18,500 of your pay to a 403(b) plan in 2018. If your plan allows Roth contributions, you can split your contribution between pretax and Roth contributions any way you wish. Unlike 401(k) plans, employee elective deferrals to 403(b) plans aren’t subject to discrimination testing (which in 401(k) plans can often significantly limit the amount higher-paid employees can defer). If your plan permits, you may also be able to make “catch-up” contributions to your account. You can contribute up to an additional $6,000 in 2018 if you’ll be age 50 or older by the end of the year. If you have 15 years of service with your employer (even if you haven’t attained age 50) a special Section 403(b) rule may also allow you to make annual catch-up contributions of $3,000, up to $15,000 lifetime. If you’re eligible for both rules, then any catch-up contributions you make count first against your 15-year $15,000 lifetime limit. If you also contribute to a 401(k), 403(b), SIMPLE, or SARSEP plan maintained by the same or a different employer, then your total elective deferrals to all of these plans – both pretax and Roth – can’t exceed $18,500 in 2018, plus catch-up contributions. It’s up to you to make sure you don’t exceed the limits if you contribute to plans of more than one employer. Total contributions to your 403(b) account – both yours and your employer’s – can’t exceed $55,000 in 2018 (or 100% of your compensation, if less). Age 50 catch-up contributions are not included in this limit, but special. Section 403(b) catch-up contributions are. (Aggregation rules may apply if you also participate in a qualified retirement plan.) CAN I ALSO CONTRIBUTE TO AN IRA? Yes. Your participation in a 403(b) plan has no impact on your ability to contribute to an IRA. You can contribute up to $5,500 to an IRA in 2018, $6,500 if you’ll be age 50 or older by the end of the year (or, if less, 100% of your taxable compensation). However, depending on your income level, your ability to make deductible contributions to a traditional IRA may be limited if you contribute to a 403(b) plan. (Your income level and tax filing status may also impact your ability to contribute to a Roth IRA.) 1 INCOME TAX CONSIDERATIONS When you make pretax 403(b) contributions, you don’t pay current income taxes on those dollars (which means more take-home pay compared to an after-tax contribution of the same amount). But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, your after-tax Roth 403(b) contributions are subject to income taxes up front, but are tax free when distributed to you from the plan. And, if your distribution is qualified, then any earnings are also tax free.
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