WHAT IS A 403(B)?

A Tax-Sheltered Annuity (TSA), also known as a 403(b) plan is named after a section of the Internal Revenue Code. It is an employer sponsored retirement savings program.

Participation is limited by law to employees of public educational organizations and certain nonprofit organizations. Contributions to a 403(b) are made for the participating employee by his or her employer. The money that is contributed to the 403(b) comes either from employer contributions, which are called non-elective deferrals, or from employee contributions, called elective deferrals.

Elective deferrals are deducted from the participant’s paycheck and forwarded to the insurance company or mutual fund custodian selected by the participant. The participant signs a salary reduction agreement giving the employer the authority to make the paycheck deduction and remit it to the chosen company. Most 403(b) contributions are elective deferrals.

You may contribute 100% of your compensation subject to the elective deferral limit of $16,500 for this year. For individuals age 50+, an additional $5,500 can be contributed for this year. If a 403(b) participant has 15 or more years of service, they may be eligible for an additional “catch-up” provision. A “catch-up” provision of $3,000 is available only if the participant has not contributed on average more than $5,000 per year into a 403(b) account. An averaging calculation must be done to ensure that the option is available. A lifetime limitation of $15,000 applies to this special “catch-up” provision.

WHEN MAY I WITHDRAW THE MONEY IN MY 403(b)?

Under current law, you may begin withdrawals at any time once you have attained age 59½, and you are required by law to begin making withdrawals once you are 70½. There are important exceptions to the general rules.

If you separate from service with your employer prior to age 59½, but on or after age 55, the law permits you to withdraw money from your 403(b) with no tax penalties or restrictions. If you separate from service prior to age 55 you are permitted restricted access to your money, but you must stretch out the distribution in a way that would systematically liquidate your account over your life expectancy. In other words, the amount you can withdraw each year is restricted. The good news is, once you have attained age 59½ and if you have made systematic withdrawals for at least five years, current law permits you to revoke the previous withdrawal election and have full access to your money.

When you reach age 70½, if you have not already started withdrawing money from your 403(b), you must generally begin doing so at that time. There are exceptions. If you are still working for an eligible employer you may defer making any withdrawals until you actually retire.

If you die before you have begun making any withdrawals from your 403(b), your surviving spouse (if any) may become successor owner of your 403(b). He or she will have the same rights as you had except that no further contributions may be made. If your beneficiary is someone other than your spouse, he or she may take all the money at once or may stretch out the distribution over a period of years.

The distribution rules are complicated and it is important to comply with them to avoid tax penalties. Your 403(b) company or agent can provide you with the information you will need. There is a reason for the withdrawal restrictions on your 403(b). When Congress enacted the law creating 403(b) plans, the intent was for you to use your 403(b) as a retirement savings vehicle, not as a short term tax-sheltered savings account.

MAY I BORROW AGAINST THE MONEY IN MY 403(B) FOR EMERGENCIES?

Yes. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) makes it possible for you to borrow from your 403(b).

Most fixed dollar 403(b) contracts have a loan feature, as do some variable annuities. Loan provisions vary from company to company. The law permits you to borrow 100% of the withdrawal value of your 403(b) if the loan does not exceed $10,000. If the amount borrowed exceeds $10,000, the maximum loan is 50% of the cash value of your 403(b) not to exceed $50,000.

By law, the loan must be repaid in at least quarterly installments of principal and interest over a period not to exceed five years, with one exception: if the purpose of the loan is to acquire a dwelling intended to be your principal residence within a reasonable time, the repayment period may be extended beyond five years with the agreement of the 403(b) company.

When making a loan, first check to see what interest rate the company will charge you on the borrowed amount. Then, find out what interest rate will be credited on the accumulation value in your account set aside as collateral for the loan. You should take these things into consideration in deciding whether a TEFRA loan is better for your circumstances than borrowing from a bank or credit union.