403(b)

The 403(b) is a tax deferred, defined contribution plan available to employees of educational institutions such as public school districts and certain (Internal Revenue Code section) 501(c)(3) non-profit groups, which include colleges, universities, hospitals, charities and the clergy.

The 403(b) has a long history (see the accompanying sidebar) and a long association with the insurance industry. The following table provides a summary of 2008 year end 403(b) assets as well as the distribution of assets across annuity and mutual fund investment platforms.

Source:Spectrem Groug (via 403b. wise) For historical data:403b.wise from Spectrum Group

Summary
Contributions to a 403(b) plan are tax-deductible, and any earnings accumulate tax-free until withdrawals are made. Withdrawals are taxed at ordinary income rates, and a 10% penalty tax is assessed on withdrawals made prior to the age of 59 ½, unless one meets one of the following exclusions:
 * Attain age 59-1/2
 * Separate from service in or after the year in which you reach age 55
 * Part of a series of substantially equal periodic payments for your life or the joint lives of you and your designated beneficiary
 * Hardship
 * Disability
 * Death
 * Made due to an IRS levy upon your participant account
 * Paid to an alternative payee under a qualified domestic relations order
 * Is a qualified reservist distribution as defined under the Pension Protection Act of 2006
 * Is a payment of qualified medical expenses greater than 7.2% of your adjusted gross income.

Contributions
Employees may contribute up to 100% of their salaries, subject to the following limits:

Employees with 15 or more years of service with public school systems, hospitals, home health service agencies. health and welfare agencies, churches, or convention or associations of churches may be able to defer an extra $3,000 in catch-up contributions (to a lifetime maximum of $15,000).

Distributions

 * MRD Suspended for 2009
 * "If you're over age 70½, you won't have to take required minimum distributions (RMDs) in 2009 from your tax-deferred retirement accounts under new legislation signed by President Bush.
 * The 2009 RMD suspension applies to traditional IRAs,  401(k)s,  403(b)s, and other defined contribution plans. The suspension also applies to investors under age 70½ with  inherited IRAs or inherited retirement plan accounts that would otherwise be subject to RMDs."--Vanguard News release, December 23, 2008

Advantages
Participants who are eligible for a 457(b) and a 403(b) through their employer can contribute the maximum of both plans, which at $16,500 each is a combined $33,000. See 457(b)wise FAQ for more information.

Criticisms
A common option of 403(b) plans are a tax-sheltered Fixed Annuity or Variable Annuity since the 403(b) is heavily tied to the insurance industry. These products often come with an extra layer of fees and restrictions such as surrender charges; mutual funds are possible but only if they are in plan to choose from. Also, the extra tax-deferral features of the annuity are unnecessary since the 403(b) is already a tax-deferred account. If mutual funds are not available in the 403(b) outside of an annuity, the participant should lobby the employer to offer some lower fee mutual funds. See How to Campaign for a Better 401(k) Plan if you are in this situation for further reading.

Links

 * 403b FAQ
 * IRS Draft Prototype 403b Plan (April 9, 2009)


 * IRS IRC 403(b) Tax-Sheltered Annuity Plans
 * IRS Publication 571 Tax-Sheltered Annuity Plans(403(b)Plans)
 * IRS Publication 575 Pension and Annuity Income
 * 403(b)wise
 * 403bCompare for California residents