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403b pearls of wisdom for teachers

Retirement Pearls of Wisdom for Teachers

Ask Questions, Save Money When It Comes to Your 403(b)

Let’s be honest. Life is busy. Sometimes even knowing what types of retirement options are available to you—or even which ones you have–is difficult enough, without allocating the time to really understand each. Perhaps all too often, things are left to auto-pilot when it comes to paycheck designations – you opt-in because you can. But in the case of teacher’s 403(b) retirement plans, brushing up on the specifics of yours may be well worth your effort. In fact, it can potentially gain you thousands more in the long run – and really takes little more than just some smart homework. So…. let’s start with the very basics, and get you on track to maximize the money you’re striving to sock away for later, or at the very least, to become aware of the power you hold toward such noble pursuits in the future.

Retirement 101:

403(b) Vocab Terms for Teachers:

Tax-Deferred
Money that comes out of your paycheck and which is automatically invested into an account which is not reportable as income now, but will be when paid out during retirement.
Annuity
A contracted account offered by an insurance company where a lump sum of money is deposited for the purpose of being paid out at a later date, in either equal installments or in proportion to how well it accumulates with investment strategies applied over time.
Provider
Either an insurance company, an investment firm or a retirement account custodian that offers 403(b) plan options to employers. These vendors choose portfolios to invest the money in to hopefully increasing its principal value over time and setting plan rules, regulations and annual fees.
403b Plan Products
Accounts set up by Providers that are meant to take in money now from clients and pay it back out to them later in installments as a means of seeking to establish a retirement “income,” after it has been invested toward growth over time in such things as stocks and mutual funds, etc. Examples include annuities, mutual fund retirement accounts, and combination programs.

What IS a 403(b) plan?
A 403(b) is a retirement savings program much like a 401k, but has special allowances tailored specifically to the teaching profession and a few others (because they have certain exemptions as public educational institutions, not-for-profits or as certain types of churches). When you work as a teacher, it is likely your school district employer will offer you the opportunity to contribute to a 403(b), helping you save for retirement, reducing your taxable income, potentially matching your funds (if you’re lucky enough to have an employer choosing to offer this) and in many cases, allowing you to decide your amount of contribution up to a maximum set by the IRS. What makes a 403(b) special is that you do not need to pay taxes on the money contributed into the account now (it’s tax-deferred). When the money begins to produce regular pay outs in the future, assumably at the time of retirement, you will then be taxed on it as regular income–but as a retiree and typically at a lower rate.

Do I have one?
If you work as a teacher, chances are you have had the opportunity to enroll in your district’s plan, or one of the plans they offer if multiple. But just because your employer has chosen a plan for you and you’ve opted in with reductions from your paychecks, it doesn’t necessarily mean these work best for you as is. In fact, it may not, as employers choose plans for a variety of reasons supporting their best interests—and these may not necessarily mesh with yours. This doesn’t always mean you’re locked into their default settings; sometimes switching to another “provider” for your plan (plans are set up for employers by different vendors) is allowed–and can help you to pursue optimal dollars for the future, once able to properly compare alternatives and their different offerings. Similarly, sometimes you can change some of the options within your plan. You’re already doing the hard work daily. Why not reap the most reward that is in essence, your earned cash?

What are some common types of 403(b)’s?
403(b) plans can either place your pre-tax investment dollars into annuities or mutual funds so they hopefully will grow over time. Such investments are chosen and managed by the vendor which provides your employer’s plan, and which manages the portfolio therein; diversifying investments based on what they feel will serve best for their clients, ensuring, in theory, good growth over time and reasonably low risk, and the benefit of relatively safe, low-maintenance investing.

Who are some 403(b) Providers?
Simply put, providers can be institutions like insurance companies, investment firms that run mutual funds or retirement account custodians that set up diversified 403(b) plan products and offer them to employers. These providers set up rules for the plan including minimum contributions, possible commissions for their investing services, time before payout is available without penalty, annual and other fees, if there might be a Roth 403b feature (look out for our future post explaining this type of offering), etc., and they pick investment portfolios in which to hopefully grow your money while it “sits.” Examples are financially savvy companies like Fidelity, Vanguard, FTJ Fundchoice and Aspire Financial.

BUT, while 403(b) individual terms and conditions are necessary, and important components of a plan…. these are factors you should ALWAYS check into! Here’s why:

Providers are not equal.
Although your employer chooses a provider for your 403(b) as previously mentioned, ranging from insurance companies offering annuities to financial institutions managing mutual funds to combination accounts, some districts allow you to override this choice and pick your own; some do not. Finding out what your specific circumstance is can be accomplished by asking a simple question of HR, and then doing some minimal research on the benefits of each of the alternative providers and what they offer, if you’re allowed a choice. Everyone has different investment strategies and goals, so it is important to make sure you are reasonably informed about where your money is going and why. We’ve found that many teachers that come to us have typically been invested in annuities and don’t have any idea about how much has been vested in these to date, or how their money is being managed within the constructs of their plan. It is a good idea to check into how experienced the investors running your plan’s portfolio are, and what their reputation is.

“Often times, clients come to us with 403(b) accounts that are annuities. These may contain fees for features you may not even need or want – depleting your future nest egg as they add up over years. Sometimes, it takes little more than some polite inquiring to identify these and potentially do something about them.”

403b plans and specifically, annuities, often have hidden fees written in.
This is certainly not uncommon. It takes but a simple but carefully-worded letter (see our post Do You Know How Much You Are Paying in Retirement Fees?) to identify if and what extraneous fees exist in your plan, if they are warranted for your goals and circumstances or should they be unnecessary for you – and believe it or not, this is often the case! Of further note, different providers have different operating rules and investment objectives which can vary greatly among product vendors and across investments. Some accounts impose surrender charges or restrictions on early withdrawals. It can be very useful to know what yours are now, should you feel they are not in line with what your needs or desires might be in the future. Additionally, some vendors impose commission fees on investment earnings, and some do not or have lower ones. Imagine! You could spend years contributing to a plan that may not serve you in the long run, or paying portions of your earnings for things that don’t apply to you or that you really don’t need–and which you can very simply, opt out of, or not be charged for in a different plan. These things add up and detract from the money you get when you retire, compounded monthly… over years into what can be quite a large sum of money by the time you reach withdrawal age! This is why it is important you find out as much as you can about the specific 403(b) you have and make a few smart decisions now. Examples include, discerning and choosing between different types of annuities that may carry varying degrees of risk, or, changing from a plan that owns multiple mutual funds requiring additional fees – to one that avoids these in its portfolio if preferable.

“It is possible to be invested in a minimally advantageous 403(b) plan, with among potential negatives exorbitant fees, unreasonable commissions that are being charged on your gains, penalties for making changes, or even fund investments that the vendor is being paid to make over others. In fact, sometimes a Provider might push its lead product to districts over its best product because it will benefit their own bottom line.”

It’s worth the effort.
Studying up on different types of providers can be an annoyance, but is also relatively easy and can be followed up by educating yourself on what questions to ask while you compare potential plans. Look for
future posts here, like What Questions to Ask When You Compare 403b Providers and What to Do if You’re Unhappy with Your 403b Provider. Should you need help weeding through that jungle, or if you simply would rather have someone do the work for you, we are here to help and are already familiar with the different common area providers and their plans.

403(b)s can be self-directed investing.
While most people are happy to let their provider manage their money and investments once contributed to the 403(b), it is important to understand that in some cases, you can as well take a more active role in choosing exactly what mutual funds your money goes in to. If one is more comfortable with high risk, or has a good grasp of the market and investments, this might be something to consider if an available option for you. Either way, understanding that 403(b)s can be self-directed is an important fact to keep in mind over the term of your investing.

Don’t Settle for Less–Pursue That Potentially Higher Return on Investment!

Don’t let ignorance or a busy lifestyle stand in the way of protecting your future. You know what they say – an ounce of prevention is worth a pound of cure! Now that you’ve read up on 403(b)’s, it’s time to take some action and do a little hand raising yourself! Once you’ve garnered some basic information about what type of account you have, and what type of fees you might be paying, you can take steps to better secure your financial situation should it be warranted. And we are here to help.

Don’t Want to Go It Alone or Need Some Help? We’re Here.

Please know that if you have any questions along your journey or if you’d like some advice or expert assistance, or even for us to do the hard work for you, we’re available to assist. Give a call to our office at (845) 981-7300 today or continue consulting our blog and future posts on this important topic, and empower yourself to take actions in your best interest toward the future you deserve. Good luck!


Investing involves risks, including the loss of principal.

Fixed and variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

The Roth 403(b)

Some employers offer 403(b) plan participants the opportunity to make Roth 403(b) contributions. If you’re lucky enough to work for an employer that offers this option, Roth contributions could play an important role in maximizing your retirement income.

What is a Roth 403(b)?

A Roth 403(b) is simply a traditional 403(b) plan that accepts Roth 403(b) contributions. Roth 403(b) contributions are made on an after-tax basis, just like Roth IRA contributions. This means there’s no up-front tax benefit, but if certain conditions are met, your Roth 403(b) contributions and all accumulated investment earnings on those contributions are free from federal income tax when distributed from the plan. (401(k) and 457(b) plans can also allow Roth contributions.)

Who can contribute?

Once you’re eligible to participate in a 403(b) plan, you can make Roth contributions regardless of your salary level. (This is in contrast to a Roth IRA where your contributions may be reduced, or you may not be eligible to contribute at all, if your income exceeds certain amounts.)

How much can I contribute?

There’s an overall cap on your combined pretax and Roth 403(b) contributions. In 2017, you can contribute up to $18,000 of your pay ($24,000 if you’re age 50 or older)1 to a 403(b) plan. You can split your contributions any way you wish. For example, you can make $10,000 of Roth contributions and $8,000 of pretax 403(b) contributions. It’s up to you.

But keep in mind that if you also contribute to a 401(k), SIMPLE, SAR-SEP, or another 403(b) plan, your total contributions to all of these plans–both pretax and Roth–can’t exceed $18,000 (plus catch-up contributions) in 2017. It’s up to you to make sure you don’t exceed these limits if you contribute to plans of more than one employer.

If you also participate in a Section 457(b) plan, any pretax contributions you make to the 457(b) plan are in addition to your 403(b) contributions. This means you can contribute up to $18,000 of pay, Roth or pretax, to the 403(b) plan and an additional $18,000 pretax to the 457(b) plan in 2017 (plus catch-up contributions)–a significant savings opportunity.

Can I also contribute to a Roth IRA?

Yes. Your participation in a Roth 403(b) plan has no impact on your ability to contribute to a Roth IRA. You can contribute to both if you wish (assuming you meet the Roth IRA income limits). You can contribute up to $5,500 to a Roth IRA in 2017, $6,500 if you’re age 50 or older (or, if less, 100% of your taxable compensation).2

Should I make pretax or Roth 403(b) contributions?

When you make pretax 403(b) contributions, you don’t pay current income taxes on those dollars. But your contributions and investment earnings are fully taxable when you receive a distribution from the plan. In contrast, Roth 403(b) contributions are subject to income taxes up front, but qualified distributions of your contributions and earnings are entirely free from federal income tax.

Roth contributions could play an important role in maximizing your retirement income.
1 Special Section 403(b) catch-up rules may also apply.
2 If you have both a traditional IRA and a Roth IRA, your combined contributions to both cannot exceed $5,500 ($6,500 if age 50 or older) in 2017.
3 You can avoid tax on the non-Roth portion of your distribution (any pretax contributions, employer contributions, and investment earnings on these contributions) by rolling that portion over to a traditional

The better option depends on your personal situation. If you think you’ll be in a similar or higher tax bracket when you retire, Roth 403(b) contributions may be more appealing, since you’ll effectively lock in today’s lower tax rates. However, if you think you’ll be in a lower tax bracket when you retire, pretax 403(b) contributions may be more appropriate. Your investment horizon and projected investment results are also important factors. A financial professional can help you determine which course is best for you.

Are distributions really tax free?

Because your Roth 403(b) contributions are made on an after-tax basis, they’re always free from federal income tax when distributed from the plan. But the investment earnings on your Roth contributions are tax free only if you meet the requirements for a “qualified distribution.”

In general, a distribution is qualified only if it satisfies both of the following requirements:

  • It’s made after the end of a five-year waiting period
  • The payment is made after you turn 59½, become disabled, or die

The five-year waiting period for qualified distributions starts with the year you make your first Roth contribution to the 403(b) plan. For example, if you make your first Roth contribution to your employer’s 403(b) plan in December 2017, then the first year of your five-year waiting period is 2017, and your waiting period ends on December 31, 2021.

But if you change employers and roll over your Roth 403(b) account from your prior employer’s plan to your new employer’s plan (assuming the new plan accepts Roth rollovers), the five-year waiting period starts instead with the year you made your first contribution to the earlier plan.

If your distribution isn’t qualified (for example, you receive a payout before the five-year waiting period has elapsed or because you terminate employment), the portion of your distribution that represents investment earnings on your Roth contributions will be taxable and subject to a 10% early distribution penalty unless you’re 59½ or another exception applies.

You can generally avoid taxation by rolling your distribution over to a Roth IRA or to another employer’s Roth 401(k), 403(b), or 457(b) plan, if that plan accepts Roth rollovers. (State income tax treatment of Roth 403(b) contributions may differ from the federal rules.)3

What about employer contributions?

Your employer can match your Roth contributions, your pretax contributions, or both. But your employer contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer’s contributions, and investment earnings on those contributions, are not taxed until you receive a distribution from the plan.

What else do I need to know?

Like pretax 403(b) contributions, your Roth 403(b) contributions and investment earnings can be paid from the plan only after you terminate employment, incur a financial hardship, attain age 59½, become disabled, or die.

You must begin taking distributions from a Roth 403(b) plan after you reach age 70½ (or after you retire if later). But this isn’t as significant as it might seem, since you can generally roll over your Roth 403(b) dollars (other than RMDs themselves) to a Roth IRA if you don’t need or want the lifetime distributions.

Employers aren’t required to make Roth contributions available in their 403(b) plans. So be sure to ask your employer if it is considering adding this exciting feature to your 403(b) plan.

Roth 403(b) Roth IRA
Maximum contribution (2017) Lesser of $18,000 or 100% of compensation Lesser of $5,500 or 100% of compensation
Age 50 catch-up
(2017)*
$6,000 $1,000
Who can contribute? Any eligible employee Only if under income limit
Age 70½ required distributions? Yes No
Potential matching contributions? Yes No
Potential loans? Yes No
Tax-free qualified distributions? Yes, 5-year waiting period plus either 59½, disability, or death Same, plus first-time homebuyer expenses (up to $10,000 lifetime)
Investment choices Limited to plan options Virtually unlimited
Bankruptcy protection Unlimited At least $1,245,475 (total of all IRAs)

*Special Section 403(b) catch-up rules may also apply.


This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

403b basics

403(b) Plan Basics

What is a 403(b) plan?

How does a 403(b) plan work?

Depending on the specific type of 403(b) plan, contributions may be made by the employee, the employer, or both the employee and employer. Many 403(b) plans are similar to 401(k) plans: you elect either to receive cash payments (wages) from your employer immediately, or to defer receipt of all or part of that income to your 403(b) account. The amount you defer (called an “elective deferral”) can be either pretax or, if your plan permits, after-tax Roth contributions.

Employer contributions, if made, may be a fixed percentage of your compensation, or may match a specified percentage of your contribution, or may be discretionary on the part of the employer. One unique characteristic of 403(b) plans is that your employer is allowed to make contributions to your account for up to five years after you terminate employment.

Who can participate in a 403b plan?

In general, if any employee is eligible to make elective deferrals, then all employees must be allowed to do so. This is called the “universal availability rule.” However, your employer can exclude certain groups of employees from participation (for example, employees who normally work less than 20 hours per week, or who are eligible under another deferral plan–for example, a 401(k) plan–of the employer).  Your employer may also require that you attain age 21 and/or complete up to two years of service before you’re eligible for employer contributions.

Some 403(b) plans provide for automatic enrollment once you’ve satisfied the plan’s eligibility requirements. For example, the plan might provide that you’ll be automatically enrolled at a 3% pretax contribution rate (or some other percentage) unless you elect a different deferral percentage, or choose not to participate at all. If you’ve been automatically enrolled in your 403(b) plan, make sure that your assigned contribution rate and investments are appropriate for your circumstances.

What are the 403b plan contribution limits?

403b Teachers AppleYou can defer up to $18,000 of your pay to a 403(b) plan in 2017. If your plan allows Roth contributions, you can split your contribution between pretax and Roth contributions any way you wish. Unlike 401(k) plans, employee elective deferrals to 403(b) plans aren’t subject to discrimination testing (which in 401(k) plans can often significantly limit the amount higher-paid employees can defer).

If your plan permits, you may also be able to make “catch-up” contributions to your account. You can contribute up to an additional $6,000 in 2017 if you’ll be age 50 or older by the end of the year. If you have 15 years of service with your employer (even if you haven’t attained age 50) a special Section 403(b) rule may also allow you to make annual catch-up contributions of $3,000, up to $15,000 lifetime. If you’re eligible for both rules, then any catch-up contributions you make count first against your 15-year $15,000 lifetime limit.

If you also contribute to a 401(k), 403(b), SIMPLE, or SARSEP plan maintained by the same or a different employer, then your total elective deferrals to all of these plans–both pretax and Roth–can’t exceed $18,000 in 2017, plus catch-up contributions. It’s up to you to make sure you don’t exceed the limits if you contribute to plans of more than one employer. Total contributions to your 403(b) account–both yours and your employer’s–can’t exceed $53,000 in 2017 (or 100% of your compensation, if less). Age 50 catch-up contributions are not included in this limit, but special Section 403(b) catch-up contributions are.  (Aggregation rules may apply if you also participate in a qualified retirement plan.)

Can I also contribute to an IRA?

Yes. Your participation in a 403(b) plan has no impact on your ability to contribute to an IRA. You can contribute up to $5,500 to an IRA in 2017, $6,500 if you’ll be age 50 or older by the end of the year (or, if less, 100% of your taxable compensation). However, depending on your income level, your ability to make deductible contributions to a traditional IRA may be limited if you contribute to a 403(b) plan. (Your income level and tax filing status may also impact your ability to contribute to a Roth IRA.) 1

403b Plan Income tax considerations

When you make pretax 403(b) contributions, you don’t pay current income taxes on those dollars (which means more take-home pay compared to an after-tax contribution of the same amount). But your contributions and investment earnings are fully taxable when you receive a distribution from the plan.

In contrast, your after-tax Roth 403(b) contributions are subject to income taxes up front, but are tax free when distributed to you from the plan. And, if your distribution is qualified, then any earnings are also tax free.

In general, a distribution from your Roth 403(b) account is qualified only if it’s made after the end of a five-year waiting period, and the payment is made after you turn 591/2, become disabled, or die. If your distribution is nonqualified, then you’re deemed to receive a pro-rata portion of your tax-free Roth contributions and your taxable earnings.

Your employer’s contributions are always made on a pretax basis, even if they match your Roth contributions. That is, your employer’s contributions, and any investment earnings on those contributions, are always taxable to you when you receive a distribution from the plan.

If you receive a payment from your 403(b) account before you turn 59 1/2 (55 in certain cases), the taxable portion may also be subject to a 10% early distribution penalty, unless an exception applies.

When can I access my 403b money?

In general, you can’t withdraw your elective deferrals from your 403(b) until you reach age 59 1/2, become disabled, or terminate employment (deferrals to annuity contracts prior to 1989 aren’t subject to these restrictions). Some plans allow you to make a withdrawal if you have an immediate and heavy financial need (“hardship”), but this should be a last resort–not only is a hardship distribution a taxable event, but you may be suspended from plan participation for six months or more. If your plan allows after-tax (non-Roth) contributions, your plan can let you withdraw these dollars at any time. Employer contributions to 403(b) custodial accounts are subject to similar withdrawal restrictions. But employer contributions and pre-1989 deferrals to 403(b) annuity contracts are subject to somewhat more lenient distribution rules. Check with your plan administrator for your plan’s specific rules. If your plan permits loans, you may be able to borrow up to one-half of your vested 403(b) account balance (to a maximum of $50,000) if you need the money.

What happens when I terminate employment?

Generally, you forfeit all employer contributions that haven’t vested. “Vesting” means that you own the contributions. Your plan may require up to six years of service before you’re fully vested in employer contributions, although some plans have much faster vesting schedules. (Your own contributions are always 100% vested.) You can generally leave your money in your 403(b) account, transfer it to a new 403(b) account, roll your dollars over to an IRA or to another employer’s retirement plan, or take a distribution. (2)

What else do I need to know about 403b plans?

  • You must begin taking distributions (“required minimum distributions,” or RMDs) from your 403(b) account after you reach age 70 1/2 (or after you terminate employment, if later). (The RMD rules don’t apply to contributions made prior to 1987.)
  • If your employer offers 403(b)s from various vendors, you may be able to transfer your assets from one contract to another while you’re still employed. This can be helpful if you’re dissatisfied with a particular vendor’s investment offerings.
  • Your 403(b) account is fully protected from creditors under federal law in the event of your bankruptcy. If your plan is covered by ERISA, then your account is generally protected from all of your creditors’ claims.

(1) If you have both a traditional IRA and a Roth IRA, your combined contributions to both cannot exceed $5,500 ($6,500 if age 50 or older) in 2017.

(2) When considering a rollover, to either an IRA or to another employer’s retirement plan, you should consider carefully the investment options, fees and expenses, services, ability to make penalty-free withdrawals, degree of creditor protection, and distribution requirements associated with each option.

Thanks for reading!  If you have questions about your 403b basics or need more in-depth questions answered, please contact us.