Information on 403(b) Retirement Accounts
For-profit employers can offer their employees the ability to participate in 401k plans. Non-profit organizations, instead, offer 403b plans to assist their employees in saving for retirement. Understanding how these plans work will help you better plan for retirement and decide if a 403b plan is the right investment vehicle for you.
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Types
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Only certain employers can offer traditional 403b plans or Roth 403b plans, according to the Internal Revenue Service. Traditional 403b plans are tax-deferred accounts, which means contributions to the plan do not count as taxable income. Roth 403b plans are after-tax accounts; the IRS taxes contributions, but qualified withdrawals come out tax-free.
Function
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The IRS limits 403b plans to investing in annuities and mutual funds. Either the annuities can be fixed-rate annuities, which have a set rate of return that is not tied to any particular investment, or variable annuities, whose rate of return varies based on the performance of specified investments. Mutual funds are managed accounts that invest in a range of stocks. Those offering 403b plans cannot use individual stocks, bonds or real estate as investment vehicles, notes the Motley Fool.
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Benefits
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In addition to the type-specific tax benefits, all 403b plans count as tax-sheltered accounts; the IRS does not tax the earnings in the account as long as they remain in the 403b plan. In addition, 403b plans can accept employer contributions. The Motley Fool notes that employees are always fully vested in 403b plans; employers cannot require them to work for a certain number of years before they can keep the contributions if they leave the job.
Size
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The IRS restricts how much money you can contribute on an annual basis to the 403b plan. Individuals cannot contribute more than the smaller of their earned income or the annual contribution limit. As of 2010, the annual contribution limit was $16,500 if you are younger than 50, or $22,000 if you are 50 or older. Employer contributions, plus employee contributions, cannot be more than your total compensation for the year, or $49,000, whichever is smaller, warns Fidelity.
Timeframe
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You can only take withdrawals from a 403b plan after you have left your job, suffered a permanent disability or reached age 59 1/2. Withdrawals taken before age 59 1/2 are subject to an early withdrawal penalty of 10 percent, unless an early withdrawal exception, such as retiring after turning 55, applies.
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