Financial Management Network

403(B) 101

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.

There are some significant beneifts with a 403(b) plan. First, you can get a tax deduction for your contributions into the pre-tax account. Or, you can forego the tax deduction and contribute into the Roth 403(b) where you'll never be taxed on investment gains again. Second, you'll be able to make contributions into a retirement plan while overseas/out of the US and claiming the full foreign earned income credit (FEI). Utilizing the FEI can disqualify you from contributing to retirement plans like IRAs and Roth IRAs. The 403(b) however allows for contributions even while using the FEI. Finally, with the 403(b) you gain access to professional money managers and allocation advice through FMN via the LifeSpan allocations.

Wycliffe has a 403(b) plan in place that utilizes two different funding vehicles - mutual funds, and Lincoln stable value.” The mutual funds are a diverse mix that cover virtually all asset classes. The Stable Value Fund has no exposure to the stock or bond market. It is a fund that pays a fixed interest rate (adjusted quarterly) backed by Lincoln Financial. For more info on the Stable Value Fund click on the tab below.

What is the contribution limit for 403(b) plans? The Internal Revenue Code (IRC) contains overlapping limitations that apply when determining exactly how much can be put into a 403(b) plan.

For 2013, an employee may defer up to $17,500 of his or her compensation to a 403(b) plan on a pretax or Roth basis ($17,500 for 2013). An additional $5,500 "catch-up" retirement savings provision is also available for employees age 50 and over. These individuals may contribute $23,000 for 2013. This is assuming you have enough income to support the contribution. Remember, the only way to contribute to this plan is to elect to have income withheld from your paycheck and contributed to the 403(b) plan. You may not have enough income to support the maximum contribution.

Tax advantages of 403(b) plans:

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: Tax-deferred growth: Funds held in a 403(b) account grow on a tax-deferred basis. Only when an employee begins to receive distributions from the account will he or she pay income tax on the total distribution.

Possible tax credit: As a result of the 2001 Tax Act, some employees who participate in a 403(b) plan may qualify for a partial income tax credit for amounts deferred to the plan (Retirement Savers Credit). The amount of the tax credit (if any) is based on the employee's annual gross income and federal income tax filing status.

As with any tax deferred retirement plan. You'll pay taxes on the withdrawals in retirement at whatever tax bracket you're in at that time. If you use the Roth 403(b), the withdrawals in retirement will never be taxed.

Tip 1: As a result of the 2001 Tax Act, WBT is able to allow employees to make after-tax "Roth" contributions to the 403(b) plan. These contribution amounts and related earnings may be completely tax free when distributed to the employee from the plan, if over age 59.5 years and the account was in force for five years or more. All of the rules and limits for pretax salary-reduction contributions will also apply to after-tax Roth contributions.

Tip 2: Salary-reduction contributions (but not employer contributions) are generally subject to Federal Insurance Contributions Act (FICA)and Federal Unemployment Tax Act (FUTA) payroll taxes.