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TSA/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). You can also obtain this document by calling 1-800-829-3676.

Who can contribute to a 403(b)?
Employees of tax-exempt organizations established under section 501(c)(3) of the Internal Revenue Code. These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations. Participants include teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians, and ministers.

Why Contribute to a 403(b)?
A Healthy Retirement - Most employees of educational institutions and other non-profit organizations are provided with a pension upon retirement. Few pension plans, however, provide an amount equal to salary. A 403(b) plan can provide a healthy supplement to a pension.
 
Lower Taxes - 403(b) contributions are made on a pre-tax basis which can greatly reduce your tax bill. Generally, if you contribute $100 a month to a 403(b) plan, you've reduced your Federal income taxes by roughly $25 (assuming you are in the 25% tax bracket). In effect, your $100 contribution costs you only $75. The tax savings are magnified as your 403(b) contribution increases.
 
More Tax Savings - all dividends, interest and capital gains accumulate in a 403(b) account on a tax-deferred basis. This means your earnings will grow tax-free until time of withdrawal.

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.

How much can I contribute annually?
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).

Before committing to any 403(b) investment option, what questions should I ask?
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.

How is a 403(b) different from 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.

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.










 

 





Information obtained by this website:  http://www.403bwise.com/faqs/ 

 


TSA/403(b)
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