There are alternative retirement programs aimed at those who cannot access a normal 401k vehicle. The 403b program is one of these alternatives offering a tax shelter for the plan’s users. This plan is offered by certain non-profit employers, ministries, and educational organizations. Employers chose the provider of their 403b programs, which changes the options that employees have as investments and their costs.
403b programs are fed with pre-tax dollars which are used to purchase investments. Your taxable salary is reduced by the amount of money directed to your retirement funds. The program itself is directed and defined by you. You choose the investments in the plan and the amount directed to the fund itself. Your money can be invested in many types of annuities and mutual funds. At retirement, your working income is replaced by the withdrawals from your 403b’s accumulated value.
The annual contribution limit is the same as the 401k program. In 2013, workers can contribute up to $17,500 in salary into their 403b programs. If they are over 50 years of age, they can contribute an additional $5,500 annually. Workers who have worked for the same organization for over 15 years can contribute an additional amount of $3,000 in 2013 if their employer’s plan allows. These caps on contribution increase over time, adjusting for inflation. If your organization allows access to both a 403b and another plan, such as a 401k, you can contribute the maximum contribution to both plans. However, the chances of your employer offering multiple plans are extremely low.
403b Programs and Cost
Check your 403b plan thoroughly for hidden costs and expenses. Many plans have hidden costs. They may have increased costs for the mutual funds in the program. Costs will slow your 403b plan growth rate over the long term. Be sure to compare the costs for mutual funds and annuities inside the plan with their costs outside of your plan. Your 403b tax benefit can be eliminated by the costs of the plan.
Roth 403b Plans
You also have the option of using a Roth 403b. Roth variations of retirement funds are built with after-tax dollars. Your contributions will not reduce your taxable income. In exchange, withdrawals you earn at the end of your life will be tax-free. Roth accounts are great if you are currently in a low tax bracket and expect your tax bracket to rise long term. You’d pay higher taxes at your withdrawal age than at your deposit age. Younger income earners usually benefit from this category. You can currently contribute money to both a regular 403b account and a Roth 403b account. You will not be able to contribute beyond the $17,500 limit in 2013, but you are able to divide the contributions any way you want underneath that total. If your employer offers a Roth 403b it may be a better option for you, but they are not required to host these accounts.
If you leave your job at a 403(b) provider, you can rollover the plan into a 457 or a pre-tax IRA. Rollovers transfer assets to those programs, but the rules and regulations of your program will change to match those programs.
You might die before your 403b fund is empty. In this case, your assets will be inherited by your beneficiary. Note that your beneficiary is not designated by your will. You must entitle your beneficiary in the 403b’s forms. If you want to change who inherits your funds, you must update the beneficiary. No other document will impact who receives your 403b in the case of your death.
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