Much has been written about the 401k retirement plan. It’s one of the most popular retirement plans available, and chances likely that your company offers this benefit to you.
What isn’t as well-known, but is just as beneficial when saving for retirement, is the 403b retirement plan. Let’s take a brief look at what it is, who’s eligible, and other important details.
What is a 403b plan?
It’s a retirement plan for certain employees of public schools, other tax-exempt organizations, and ministers. It can be thought of as the non-profit equivalent of the 401k plan of for-profit companies.
Who can establish a 403b?
Only employers are able to set up these accounts. Individuals can’t establish one on their own. Specifically, two types of entities can establish one:
- 501(c)(3) organizations, and
- public schools or educational organizations.
However, one note of interest is that self-employed ministers are considered both employers and employees. As such, they can contribute to a 403b for their own benefit.
Who can participate?
Employees are eligible if:
- They work for a tax-exempt organization as defined under IRS Section 501(c)(3).
- They’re involved in the day-to-day operations of a public or private school system.
- They are ministers who either:
- Are employed by a 501(c)(3) organization,
- Are self-employed, or
- Are not employed by a 501(c)(3) organization, but function as ministers in their day-to-day responsibilities with their employer.
What type of contributions are allowed?
There are 3 types of permissible contributions to 403b accounts: employee elective deferrals, nonelective contributions, and after-tax contributions.
With elective deferrals, the money is withheld from the employee’s paycheck and contributed to the 403b account. As with the 401k, contributions are not subject to income tax until funds are withdrawn. However, they are subject to payroll tax.
Nonelective contributions are either matching, mandatory, or discretionary contributions by the employer.
After-tax contributions are not deductible.
The maximum that can be contributed to a 403b in 2010 is $16,500. If you’re age 50 or older, you can make a $5,500 catch-up contribution.
In addition to this, if you have at least 15 years of service with an organization that’s eligible for a 403b plan, then the limit for contributions increases by $3,000. And the nice part about this rule is that the 15 years of service aren’t required to be consecutive.
So for 2010, an employee over age 50 who has 15 years of service could possibly contribute a maximum of $25,000 ($16,500 deferral, plus $5,500 catch up, plus $3,000 from the 15-year rule).
Do you participate in a 403b retirement plan?
Photo by Rex Pe