How Much Should You Contribute To A 403
The average goal for most people is to save around 15% of their incomes for retirement each year. Your employer match also counts toward that total.
You should always take full advantage of your employer match if you have one because it’s basically free money, earmarked for your retirement.
Consider investing in your 403 plan up to the full amount that your employer matches. You might increase the amount of your contributions each time you get a raise, then max out your IRA contributions. Then you can return to your 403 until you’ve reached the 15% goal if you still have funds you’d like to invest in your retirement.
What Happens In The Event Of My Death
When we are notified of an account holders death, we will provide information to the beneficiary regarding distribution options available to them. The WEA TSA Trust will administer separate accounts for each beneficiary if they desire to keep the account with us. Each beneficiary will be allowed to independently select his or her withdrawal options.
For more information about your retirement income options, please contact us at 1-800-279-4030.
Effective January 2020. Policies and programs described are subject to change at any time.
Withholding On Cash Payments
If you choose to physically receive part or all of your money when you retire or change jobs, this action is considereda cash distribution from your former employers retirementaccount. The cash payment is subject to a mandatory tax withholdingof 20%, which the old company must pay to the IRS, and possibly a10% penalty if you are under age 55 at the time you left thecompany.
You can avoid paying taxes and any penalties on a cash distributionif you redeposit your retirement plan money within 60 days to anIRA or your new employers qualified plan. However,youll have to make up the 20% withholding from your ownpocket in order to avoid taxes and any penalties on that amount.The 20% withholding will be recognized as taxes paid when you fileyour regular income tax at year end, and any excess amount will berefunded to you as an IRS refund.
|The Potential Cost of aCash Distribution|
If you are under age 55 when you separate from service with youremployer, and choose to take a cash distribution, be aware of howit can immediately whittle away the money youve worked sohard to save. You can take a cash distribution and avoid the 10%penalty so long as you roll over the entire $10,000 within 60 daysinto an IRA or your new employers qualified plan, even thoughyou actually received only $8,000 after paying the 20% taxwithholding. In that case, $2,000 will have to come out of yourpocket.
How To Invest In A 403 Retirement Plan
As compared to other tax-advantaged retirement plans, 403 plans have fewer investment options. Most commonly, you’re limited to mutual funds and annuities. And, in contrast to 401s, you cannot typically invest in individual stocks, exchange-traded funds , or real estate investment trusts .
Nevertheless, many 403 plans offer low-cost bond and stock index funds for retirement investments. As a general rule of thumb, you should pick a stock fund/bond fund mix that reflects your time left before retirement, as well as your risk tolerance. As you get older, you’ll typically have more bond funds and fewer stock funds.
A target-date fund can simplify your investment strategy greatly if it’s offered by your 403 plan. How so? By automatically adjusting your holdings based on your retirement target date.
As an alternative, you may invest all or part of your retirement savings in an annuity through your 403. Before you invest in annuities, consult with a financial advisor. While annuities can provide a guaranteed lifetime income, they can also be complex and expensive.
An IRA can also serve as a supplement to a 403 plan if it does not provide the options you want. However, investing in an IRA should only be done if your employer will match your 403 contributions.
Option : Roll Your Old 403 Into An Ira
May be suitable if you:
- Want to continue deferring taxes on your savings
- Want a greater variety of investment options
- Already use an IRA and want to combine your accounts so theyre easier to track
- Want access to professional investment advice from the Registered Investment Advisor managing your IRA
The most common option for managing an old 403 is to roll the account into a Traditional IRA. A Traditional IRA is set up independently, and is not affiliated with your employer. Like a 403, the Traditional IRA delay taxes on your retirement savings so you wont owe any taxes upon rollover. When you contribute money to a Traditional IRA, youre also able to deduct your contributions from your taxes, subject to income limitations and the availability of other employer-sponsored retirement plans.
If youve already been saving in a Traditional IRA, this rollover is convenient because you can transfer the 403 funds right into your current IRA. Taxes and income limitations do not apply to rollovers. IRAs also typically offer more investment options than work retirement plans and can give you access to professional investment advice from the professionals managing your IRA. In fact, one of the main benefits of rolling your 403 into an IRA is the added flexibility and depth of investment options now available to you.
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Combine With Your New Employers 403 Plan If You Have One
This is only an option for you if you decide to move on to an employer that also offers a 403 plan, and your new employer would also need to allow roll-ins to the plan. Note that you wont be able to combine your old 403 with a 401 plan or 457 plan at a new employer youll only have the choice of merging your old 403 into a new 403 plan, if thats even on the table in your specific circumstances.
- Consolidation of 403 plans into a single account
- Preserve benefits of 403 plans, like ERISA protections
- May offer distributions without penalty if you decide to retire after age 55
- Beneficial if new employer has superior 403 plan
- Still may be less effective than opening an IRA
- This will depend on costs and investments offered within the new 403
- Will take time to set up, transfer, and reinvest the money
- New 403 plan may be inferior to old plan
As long as youre fully accounting for and thoroughly understanding your 403 investments as part of your broader financial plan, youve won the battle. The next step is to ensure that your money sits in the best vehicle possible, which may be an IRA. This will completely depend on your personal situation.
How Does A 403 Work When You Retire
You have worked hard for years, but you may be uncertain about what to do with your 403 after you leave your job. If you are at or near retirement and you have been saving money in your 403 plan during that time, you can have several options.
Retirement is a major life milestone, and knowing the paths that you can take with your retirement savings can have a big impact on the quality of life you can enjoy after you stop working. Here is a breakdown of the different choices of what you can do with your 403 after you have left a full-time career, and how each of these options work.
As you go over your 403 retirement options, a good thing to think about is how, in retirement, you will replace the income that you brought home from your career. Your retirement savings inside your 403, and probably money inside other accounts, will come into play here.
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Tax Benefits Can Help You Save More
Contributions to a 401, 403, or 457 plan that come out of your paycheck on a pre-tax basis, reduce your taxable income. This can mean potential tax advantages if youll be in a lower tax bracket by contributing to your organizations retirement plan.
To maximize your savings, the contribution limit increased to $19,500 in 2020,1 some plans may have a lower limit. Log in to check your plans details.
Who Should Open A 403 Retirement Account
Only these workers are eligible to participate in a 403 retirement plan:
- Employees of 501 Nonprofit Organizations. These are tax-exempt nonprofits. Employees of other nonprofit organizations are not eligible.
- Public School Employees. This includes both faculty and staff. The IRS notes employees must be involved in the day-to-day operations of a school.
- Ministers. Eligible ministers must be employed by a 501 nonprofit, self-employed, or employed as a minister or chaplain in an organization not designated as 501, such as state-run prisons or the U.S. Armed Forces.
- Others. Employees of hospital co-ops, tribal public schools, and civilian employees of the Uniformed Services University of the Health Sciences are also eligible.
You must be employed by a company to open a 403, except for self-employed ministers.
What Should You Do With Your Old 403 Account
A question that comes up regularly is what to do with old retirement accounts. In the old days, many workers stayed at the same employer their entire career and retired with 30 to 40 years of service.
Nowadays, people are more likely to switch jobs every few years, bringing up the question of what to do with old retirement accounts such as 403 plans, . According to a survey by staffing firm Robert Half, 64 percent of workers favor job-hopping.
The result of this movement between employers is trying to decide what to do with old retirement accounts. If you find yourself in a similar position, you could do one of the following:
- Roll over the account balance directly into your new employers retirement plan, provided they have one and provided their plan accepts these types of rollovers.
- Leave your retirement account with your current account administrator
- Rollover your retirement account into a traditional IRA
- Take a cash distribution – not recommended because of the taxes and penalties that you would have to pay
Well go more in-depth about some of the options above, but first, lets discuss what a is.
What Is A 403 Account
Before we get into the different options for your 403 plan, lets go over precisely what one is so you have a better idea if this is the type of account you have. Basically, its a retirement plan for employees of certain public school districts, hospitals, tax-exempt organizations, and some ministries.
In many cases, a 403 plan is also referred to as a tax-sheltered annuity plan. Thats because when these types of accounts were first created, they mainly consisted of TSAs. Nowadays, youll find more diversity of investments within 403 plans.
These accounts can usually be set up differently depending on where they are offered and the plan administrator’s selections. However, 403 plans are treated similarly to .
They are both funded using pre-tax dollars, which allows the money to grow tax-free until retirement. They have the same annual maximum contribution limit – $19,500 for 2021 for those age 50 and younger. If youre older than 50, you can also make a catch-up contribution of an additional $6,500. Note that some 403 plans offer a Roth option as well.
Since contributions to a traditional 403 account are made on a pre-tax basis, they lower your taxable income. Also, your money will continue to grow tax-free until you reach retirement age.
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How To Choose Investments In Your 403
As mentioned above, eligible investment options in your plan will charge you a fee , so its very important to be aware of how much you are paying for the privilege of investing. Fees matter, so you need to read the plan prospectus or the contract which outlines costs of the various investment options as well as investment objectives, risk levels and performance history.
You should be able to locate this information online through your plan administrator. However, speaking to someone in your employers Human Resources department may be helpful if you need additional assistance or clarification.
Final Thoughts On 403 Plans
You need to decide what you want to do with the money in your 403 plan. If you have one of the best 403 providers and like your current returns, your 403 plan options could include leaving your investment alone.
But you could also go with a 403 plan rollover to take advantage of diversified investment options in other plans. And if you can avoid additional taxes, taking distributions may be the best choice for you. Do what works for you to meet your financial needs after leaving your job. Its your money, after all.
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How To Choose A Vendor
Depending on your schools location and the approach your district has taken with selecting vendors, you may have one vendor available or over twenty.
If you have one available, you dont have much choice but to hope your district has done its due diligence and the option is a good one. However, if you have a variety of choices, youll need to do some homework.
403s are offered in two different ways. One option is to have an insurance company provide the 403, and these are sometimes called Tax-Sheltered Annuities . The other option is to use an investment companys option.
In 99% of the cases, its better to go with an investment companys offering, as you will save a lot in fees, have better investment choices, and have more flexibility should you decide you want to move your money at some point.
Without naming names, any company that has insurance in their companys full name is going to be a more expensive and restrictive option. Avoid those!
Early Withdrawals From A 403
In some cases you can make early withdrawals from a 403 without paying a penalty.
Similarly to a 401, 403 account holders can start taking distributions in the year they leave work as long as they turn 55 or older in that same year. This is commonly referred to as the rule of 55. The biggest caveat is that all funds must remain in the 403 plan for early withdrawals to remain penalty-free.
Another option is to take substantially equal periodic payments under rule 72. You can start taking 72 distributions at any point, but once you do, you’re committing to take those distributions for at least five years or until you turn 59 1/2, whichever is later.
If you need access to your 403 funds before the year you turn 55 and 72 distributions won’t suffice, you’ll probably end up paying a 10% penalty on any withdrawals you make on top of any income taxes owed on the withdrawal.
There are a couple key exceptions to the penalty. You won’t pay the penalty for withdrawals after you’ve become disabled. Furthermore, if the withdrawal covers unreimbursed medical expenses greater than 7.5% of your adjusted gross income, you won’t pay a penalty, either. That means that if you have a medical emergency and have to pay out of pocket, you can use your retirement savings as a safety net.
Pros And Cons Of 403 Plans For Educators And Non
Teachers, such as this one are often covered by 403 plans as a retirement option
In the world of obscure IRS tax code references, 401 retirement plans get most of the attention, but 403 plans are surprisingly common. 403s cover around one in five U.S. employees with around a trillion of savings in 403 plans. That’s a lot, so here we’ll run through how these plans work. Plus we’ll look how 403 plans differ from their more frequently referenced 401 cousins. There are more similarities than differences, but the differences can matter. Also, because minimum standards sometimes don’t apply to 403 plans, they can be more of a mixed bag than 401s.
School districts typically offer 403 plans to their employees and there are approximately 8 million educators and 11 million non-profit employees in the U.S. Both groups are pretty likely to have 403 plans as retirement choices. However, most articles discuss 401 plans when discussing retirement saving.
So what is a 403 plan and how does it differ from a 401?
The Basics Of 403 Plans
First let’s review some of the basics of a 403. A 403 plan can be a good way to save for retirement, typically money goes in tax-free. Normally tax comes out of your salary before you get it, with a 403 contribution the money goes straight in, without any tax coming out first. There’s a catch of course, tax is then paid when the money is taken out, which is typically, in retirement.
403 Plans – The Good And Bad
What To Pick Within A 403?
Required Minimum Distributions For A 403
Just like a 401 or an IRA, a 403 account has required minimum distributions beginning at 72. RMDs are calculated based on the account balance at the end of the prior year and the IRS life expectancy tables.
Most plan administrators will automatically calculate and distribute RMDs to participants when they turn 72. If you fail to take the distribution, however, you’ll be subject to a 50% tax, and you’ll still need to take the distribution.
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Drawbacks To A 403 Plan
Some of the drawbacks to remember when contributing to a 403 account are:
- Few investment choices: Up until recently, 403s offered only variable annuities. While this is no longer the case, this type of account offers more limited investment options than a 401 or an IRA.
- High fees: Some 403s charge higher fees that can eat into your profits, though this isn’t true of all of them. To avoid this, do some research into the plan’s administrative costs and any fees associated with your investments and try to keep these as low as possible to maximize your profits.
- Penalties on early withdrawals: If you withdraw funds from your tax-deferred 403 before 59 1/2, you’ll pay a 10% early withdrawal penalty in addition to taxes, though the penalty is waived if you have a qualifying reason, like a large medical expense. Do note that this is also true of IRAs and 401s.
- Not always subject to ERISA: The Employee Retirement Income Security Act institutes minimum standards for retirement plans, including reporting and fiduciary standards, to protect employees. But many 403s aren’t subject to ERISA. That doesn’t mean they’re bad plans, but you should do some more research to decide if it’s the right home for your money before you begin contributing.