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What Is a 403(b) Plan?
A 403(b) plan is a special tax-deferred retirement savings
plan that is often referred to as a tax-sheltered annuity, a tax-deferred
annuity, or a 403(b) annuity. It is similar to a 401(k), but only the
employees of public school systems and 501(c)(3) organizations are eligible
to participate in 403(b) plans.
Employees can fund their accounts with pre-tax contributions,
and employers can also make contributions to employee accounts. Employer
contributions can be fixed or discretionary. Eligible employees may elect to
defer up to 100% of their salaries, as long as the amount does not exceed
$15,500 (in 2007). A special “catch-up” contribution provision enables those
who are 50 and older to save an additional $5,000. Total combined employer
and employee contributions cannot exceed $45,000 (in 2007). Contribution
limits are indexed annually for inflation.
Employees have the option of choosing the types of
investments utilized in their funds. A 403(b) can be an annuity contract, a
custodial account, or a retirement income account. It is a good idea to do a
little research before selecting how you would like to invest your funds.
Your employer can provide you with a list of the investments that are
available.
Distributions from 403(b) plans are taxed as ordinary income
and, if made before the age of 59½, may be subject to a 10% federal income
tax penalty unless a qualifying event occurs, such as death or disability.
As with other retirement plans, once you reach age 70½, you
must begin taking annual required minimum distributions. You can receive
regular periodic distributions on a schedule that is calculated based on
your life expectancy, or you can collect your entire investment as a lump
sum.
Participating in a 403(b) plan may be a good way to save for
retirement. Contact your employer to find out what type of plan is offered
and how you can take advantage of this retirement funding vehicle.
© 2007 Emerald Publications
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