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Qualified Plans -
TSAs [403(b)] |
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Tax-Sheltered Annuities
IRC Sec. 403(b)
What is a 403(b)?
The 403(b) is a tax deferred retirement plan available to employees of educational institutions and certain non-profit organizations as determined by section 501(c)(3) of the Internal Revenue Code. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income. See IRS Publication 571 for IRS details on the 403(b).
Who can contribute to a 403(b)?
Employees of tax-exempt organizations established under section 501[c](3) of the IRC. These organizations are usually referred to as section 501[c](3) organizations. Participants include teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians and ministers.
How does a 403(b) plan work?
You set aside money for retirement on a pre-tax basis through a salary reduction agreement with your employer. You choose from among the vendors offered by your employer where your money is to be invested. The money grows tax free until withdrawal at retirement.
Annual contributions
For 2005, workers are able to contribute the smaller of:
- The new elective deferral limit of $14,000 (going up to $15,000 in 2006), or
- Up to 100% of includable compensation (must be less than the elective deferral limit), or
- For those with employer matches or other employer contributions, limits are $42,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit ($14,000 for 2005). An employer can add up to another $28,000.
- In addition, if you are 50 or older at any time during 2005, you may contribute an additional $4,000.
Note: There is a provision of the IRC that temporarily increases the elective deferral limit for those eligible employees. This increase is known as the 15-year-rule. This special provision increases your elective deferral limit by as much as $3,000 more than the current $14,000 limit (as of 2005). To qualify you must have completed at least 15 years of service with the same employer (years of service need not be consecutive), and you cannot have contributed more than an average of $5,000 to a 403(b) in previous years. The increase in your elective deferral limit cannot exceed $3,000 per year under this provision, up to a $15,000 lifetime maximum. If you have 15 or more years of service with your employer, it is highly recommended that you consult with a tax professional concerning the limits on your contributions.
Investment options
• Fixed and variable annuity contracts with insurance companies
• Custodial account made up of mutual funds. This is known as a 403(b)(7)
• Retirement income accounts for churches
How do I set up a 403(b)?
Ask your employer for a list of the participating investment companies available to you. This is typically known as the vendor list. Review the vendor list and products they offer. Most companies require at least $50 per month. Return to your employer with the necessary investment paperwork to start the process.
Do I need my employer’s consent to contribute to a 403(b)?
Yes. Your employer must agree to make contributions to your 403(b) in accordance with a salary reduction agreement. This is an agreement between the employer and employee under which the employee agrees to take a reduction in salary or to forego a salary increase and the employer contributes that amount to a 403(b) for that employee.
What is the difference between a 403(b) and a TSA (tax-sheltered annuity)?
As far as the IRS is concerned, a 403(b) is a TSA, and a TSA is a 403(b). The terms are interchangeable. Either way, participants can contribute to annuities, variable annuities or mutual funds.
When can 403(b) money be accessed without penalty?
- Generally, penalty-free distribution from a 403(b) cannot occur until the participant:
- Reaches age 59.5
- Separates from service in the year turning 55 (and must be retired)
- Retired before age 55 – eligible for Substantially Equal Periodic Payments (SEPP). Participants who have retired early (before age 55), but want access to their 403(b) without penalty can do so using SEPP. This provision requires that you take a series of substantially equal periodic payments. The key is that once you start these payments they must continue for five years or until you reach 59.5, whichever takes longer. If you start at age 58, you must continue until you are 63 (min. 5 years)
- Becomes disabled
- Through a loan (some companies allow it, some don’t)
- Suffers financial hardship
- Dies
Consulting a tax professional before accessing a 403(b) money is highly recommended.
Features will vary by company and product. Please refer to
Glossary for definitions
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