What Is a 403 Annuity?
A 403b annuity is a tax shelter plan. It is similar to a 401k, though the 403b is only available to employees of public schools, churches and certain nonprofits.
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403b Benefits
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Employees can contribute some of their salary to their 403b plan and employers may, as well. The invested earnings are not taxed by the federal government and most state governments until distribution.
Employee Contributions
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The maximum employee contribution is less than 100 percent of an employee's includible compensation, which means the amount he receives from the employer included in his income or an amount set by the federal government that changes annually. If an employee has had 15 years of service, or is over age 50, he can make an age-based "catch up" contribution, which also is an amount set annually.
An employee does not have to establish a 403b, but if he chooses to do so at a later date, each employer has different rules about participation deadlines. This also would apply to changing contribution amounts.
Employees also have the option for a designated Roth account, in which contributions are taxed early and kept separate from other contributions. This account grows tax-free, and when distributed the amount is not taxed.
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Employer Contributions
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Employers are not required to contribute to employee 403b plans. However, if they choose to do so, they have three different options: matching, discretionary or mandatory.
The maximum annual contribution from an employer is less than 100 percent of the employee's includible salary or an annually set rate. Employers have the choice to contribute after an employee leaves the company or after her retirement. However, the employer can only contribute for up to five years afterward, and only through discretionary or mandatory contributions.
Early Access to a 403b
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An employee has early access to the 403b before retirement only when he reaches age 59 1/2, his employment with the company ends, he becomes disabled or can prove financial hardship. A beneficiary would have access upon the employee's death. An employee will most likely have to pay a10 percent early distribution tax, and in the case of financial hardship, the amount is considered taxable income.
Loans against the 403b also are available. An employee may borrow $10,000 or 50 percent of the account's balance, but never more than $50,000. The amount must be repaid in five years and there is interest on the loan.
Retirement
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When an employee retires, how the amount is disbursed depends on how the company's 403b is set up. It could be a monthly annuity payment or a lump sum, but only an employee's Roth account is not taxed by the government upon disbursement. An employer has the option to continue contributing to the employee's 403b after retirement for up to five years.
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- Photo Credit Image by Flickr.com, courtesy of Rob Lee
