403B PLAN

What is a 403(b) plan?
A 403(b) plan is a special type of employer-sponsored retirement plan for certain religious, public educational, and tax-exempt organizations. Typically, the employer either purchases annuity contracts for eligible employees, or establishes custodial accounts to be invested in mutual funds or other investments. In the case of annuity contracts, a 403(b) plan is sometimes referred to as a tax-deferred annuity or a tax-sheltered annuity plan (TSA). Depending on the specific type of 403(b) plan, plan contributions may be made by only the employee, only the employer, or both employee and employer (see below).

A 403(b) plan is not a qualified retirement plan, but it mimics such a plan in that it enjoys similar tax benefits. The most significant benefit is that participating employees are generally not taxed on their plan benefits (including both contributions and investment earnings) until they begin to receive distributions from the plan. Although an employer tax deduction may be possible, this is usually of little or no value, since the employer is exempt from income tax anyway.

Tax advantages of 403(b) plans
Tax advantages for employees
As with many other types of retirement plans, employees who participate in a 403(b) plan can enjoy significant tax benefits, including the following:

• Pretax contributions: Employees' salary-reduction contributions to a 403(b) plan are made on a pretax basis. The contribution is taken directly from the employee's salary and invested in the 403(b) plan before any taxes are withheld. This means that the amount each employee defers to the plan is not included in his or her gross income. The employee pays less current income tax because his or her taxable income is lower than it would otherwise be.
• Tax-deferred growth: Funds held in a 403(b) plan grow on a tax-deferred basis. Any earnings on plan investments are not taxable as long as they remain in the plan. Only when an employee begins to receive distributions from the plan will he or she pay income tax on the earnings. Depending on investment performance, this creates the potential for more rapid growth (and a larger retirement fund) than money invested outside a tax-deferred plan.
  
• Roth 403(b) after-tax contributions:
• Roth contributions: Qualified distributions of an employee's Roth contributions and earnings are tax free. WBT has implemented the new Alliance 403(b) which enables you to contribute to either the traditional 403(b) (which gives you a tax deduction for contributions, however the withdrawals are taxable) or the Roth 403(b) (which gives you no deduction for contributions, however the withdrawals are tax free).  Generally, participants will want to use the Roth 403(b) because of the foreign earned income exclusion and low tax brackets.  If you feel that you should be contributing to the traditional 403(b), please fill out the questionnaire on this site and allow FMN to help you determine this.
• This calculator will help you determine if the Roth 403(b) is the best choice for your monthly contributions (we feel that in most cases it will be).  Click here: http://www.americanfunds.com/retirement/employer/roth-401k.htm and plug in your information to see the results. Alternatively, you can view this decision tree and answer a few questions.
• Possible tax credit: Employees who participate in a 403(b) plan may qualify for a partial income tax credit for amounts deferred to the plan. The amount of the tax credit (if any) is based on the employee's annual gross income and federal income tax filing status. For more information, see the Retirement Saves Credit here: http://www.wbtplan.com/taxes_rsc.asp

What is the contribution limit for 403(b) plans?
The IRC contains overlapping limitations that apply when determining exactly how much can be put into a 403(b) plan.
For 2009, an employee may defer up to $16,500 of his or her compensation to a 403(b) plan on a pretax basis. A "catch-up" retirement savings provision is also available for employees age 50 and over. These individuals may contribute $22,000 for 2009. Pre-tax and Roth contributions are combined for purposes of these contribution limits. These are the same contribution limits that apply to 401(k) plans.
Tip: These dollar limits apply per person across all employer boundaries. Consequently, an employee who has several jobs with different employers and participates in several plans can't contribute more than a total of $16,500 in 2009 (plus any applicable catch-up contribution for those age 50 or older) to all plans. Deferrals to 401(k) plans, 403(b) plans, SIMPLEs, and SAR-SEPs are included in this limit, but deferrals to Section 457(b) plans are not (employees who participate in both a 403(b) plan and a 457(b) plan can defer the full dollar limit to each plan--a total of $33,000 in 2009 (plus any catch-up contributions)). In addition, only employee pretax salary deferrals and after-tax Roth contributions amounts count. Employer contributions and employee traditional (non-Roth) after-tax contributions, if allowed, aren't subject to these dollar limits.
Tip: You (the employee) are responsible for making sure the overall limit isn't exceeded each year.
Caution: If you contribute too much in any particular year, you must withdraw the excess by April 15 of the following year to avoid adverse tax consequences. Total annual additions for any one participant in a 403(b) plan are limited to the lesser of $49,000 (in 2009, $46,000 in 2008) or 100 percent of the participant's includible compensation. Total annual additions are the sum of employer contributions and employee contributions, plus any reallocated forfeitures from other employees' accounts. Age 50 catch-up contributions are not subject to this limit.