While not as famous as the 401k, the 403(b) plan is a type of retirement savings account used by most employees of public schools. The benefits of a 403(b) plan are often similar to those of a 401(k) plan. Account holders can take loans against their 403(b) when they are in emergency need of cash. These 403(b) loans must be paid back, just like their 401k counterparts, or there will be significant tax consequences.
403(b) Contribution Limits
The government provides fairly high 403(b) contribution limits for those who want to plan for retirement. The following is a breakdown of the potential 403(b) contributions that can be made:
- Basic salary deferral (the maximum payroll amount an employee can contribute to their 403(b) plan by having money taken out of their check) is $18,500 for fiscal year 2018.
- Employees 50 years and older can add an additional $6,000 per year in special 403(b) contributions that are often referred to as “catch-up” 403(b) contributions. This is in addition to the $18,500 they can put aside as a regular employee.
- Some people are eligible for an additional 403(b) contribution known as a 403(b) Lifetime Catch-up. This special type of 403(b) contribution is only available to employees who have worked for a qualified organization for 15 years or longer. Often, this special 403(b) contribution is referred to as the “15-year rule” from IRS Publication 571.
The government allows these 403(b) contribution limits to increase for inflation by releasing cost of living adjustment figures each year.
When you reach the age of 59 ½ years old, you can begin taking regular 403(b) withdrawals without penalties - you will simply pay regular income taxes on the money you take out of the account. If you are younger than that age, however, you will be subject to a special 10% tax penalty on top of the income tax unless you meet one of a handful of special situations.
403(b) Required Minimum Distributions
As part of your participation in a 403(b) plan, the IRS will require you to make to begin taking required minimum distributions by April 1st of the year following the calendar year in which you turn 70 ½ years old.
The only exception is if the 403(b) plan permits, and the employee is still employed, they can defer the required minimum distributions until the year after they have retired. This option is not available to those employees who own more than 5% of the company.
You will be required to begin taking required minimum distribution 403(b) withdrawals in an amount specifically calculated so that the entire balance of your assets within the retirement plan will be distributed to you by the end of your life expectancy. It may sound morbid, but an accountant will actually help you break out the actuarial tables and calculate when you are likely to pass away, using the number of years of life left as a guide to coming up with a precise figure the IRS is likely to support. In some cases, you can use the life expectancy of the designated beneficiary of the 403(b) plan, as well, which could be longer in the case of a married couple where one spouse is substantially younger than the other.
SPS does not set up these accounts and it is up to you who you choose to select as your 403(b) provider.
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