How much can I contribute annually? Before committing to any 403(b) investment option, what questions should I ask? How is a 403(b) different from a TSA (tax-sheltered annuity)?
For 2008 workers are able to contribute the smaller of:
1. the elective deferral limit of $15,500 (which is unchanged from 2007), or
2. up to 100% of includable compensation (must be less than the elective deferral limit), or
3. for those with employer matches or other employer contributions, limits are $46,000 or 100% of compensation (whichever is less). The employee is still limited to the employee elective deferral limit ($15,500 for 2008). An employer can add up to another $30,500.
4. in addition, if you are 50 or older at any time during 2008, you may contribute an additional $5,000.
Note: There is a provision of the Internal Revenue Code 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 $15,500 limit (as of 2008). 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. Note that if you are eligible to contribute to both the age 50 catch-up and the 15-year-rule the IRS will first apply any contribution above normal limits to the 15-year-rule.
What investment options are available to 403(b) participants?
1. Annuity and variable annuity contracts with insurance companies.
2. Custodial account made up of mutual funds. This is known as a 403(b)(7).
3. Retirement income accounts for churches. This is known as a 403(b)(9).
What is a fixed annuity?
Fixed annuities are contracts with insurance companies that guarantee that you will earn a minimum rate of interest during the time that your account is growing. The insurance company also guarantees that the periodic payments will be a guaranteed amount per dollar in your account. These periodic payments may last for a definite period, such as 20 years, or an indefinite period, such as your lifetime or the lifetime of you and your spouse (source: SEC).
What is an equity indexed annuity?
Equity indexed annuities are a special type of contract between you and an insurance company. During the accumulation period — when you make either a lump sum payment or a series of payments — the insurance company credits you with a return that is based on changes in an equity index, such as the S&P 500 Composite Stock Price Index. The insurance company typically guarantees a minimum return. Guaranteed minimum return rates vary. After the accumulation period, the insurance company will make periodic payments to you under the terms of your contract, unless you choose to receive your contract value in a lump sum (source: SEC).
The following recommendations come from Mutual Fund Magazine's Making More of Your 403(b).
1. Will I be penalized for pulling my money out?
"This is the most important question you can ask," says Marianne Shine, a certified financial planner in Deerfield Beach, Fla. Annuities typically penalize investors who bail out. During the first few years of the contract, you may have to pay surrender charges if you transfer your money elsewhere. Often the surrender fees start at 7% or 8% and decline by a percentage point every year. If you switch employers and move the money out of an annuity with a surrender charge, you will have to pay the penalty. Certain surrender fees, however, refuse to vanish. You'll typically discover this nasty surprise with "two-tier" annuities. With one of these, you'll pay a penalty if you decide not to annuitize your payments upon retirement. If you prefer to withdraw your money and invest it elsewhere, you can, in some cases, face a 20% or higher penalty. Unless you're approaching retirement age, it's best to flee from a two-tier annuity, Shine advises.
2. What are my investment choices?
The underlying investments within a variable annuity will be mutual funds. An insurance agent will probably refer to them as "subaccounts." What is the performance record of these funds? How does each compare with its appropriate benchmark? If a large-cap growth fund has consistently under performed the Standard & Poor's 500 Index, for example, stay away.
3. What annual fees will I pay?
You should check the yearly expense ratios for annuities as well as traditional mutual funds. Fees can dramatically erode returns over time.
4. How is an insurance company rated?
If you are investing in a fixed annuity, you need to know how financially sound the insurance carrier is. You'll want to review the ratings from at least two insurance-rating services such as A.M. Best, Moody's, and Duff & Phelps. You might assume that your money is protected within a fixed annuity, but there's no real guarantee. That's because the money in a fixed annuity is not segregated and therefore can be at risk if the insurer declares bankruptcy.
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.
How is a 403(b) different from a 401(k)?
The 401(k) is a tax-deferred retirement plan for private sector employees, while the 403(b) is a tax-deferred retirement plan for employees of educational institutions and certain non-profit organizations.
How will distributions from my 403(b) be taxed?
In most cases, the payments you receive, or that are made available to you from a 403(b) are taxable in full as ordinary income. In general, the same tax rules apply to distribution from a 403(b) that apply to distributions from other retirement plans. For more detailed information refer to IRS Publication 571. For your specific situation it's recommended that you consult a professional tax advisor.
What is a Roth 403(b)?
Similar to the Roth IRA, the Roth 403(b) allows individuals to contribute after-tax dollars to an account that will grow tax-deferred. Withdrawal of contributions will not be taxed. Employees have the option of directing 403(b) contributions to either a regular 403(b) or a Roth 403(b), or some combination of the two plans that does not exceed that year's contribution limits. The Roth 403(b) was created as part of the Economic Growth and Tax Reconciliation Act (EGTRRA) of 2001 and became available in January 2006. It is expected to take time before the Roth 403(b) is widely offered by employers.
Before committing to any 403(b) investment option, what questions should I ask?
How is a 403(b) different from a TSA (tax-sheltered annuity)?
Information obtained by this website: http://www.403bwise.com/faqs/