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  Frequently Asked Questions  
 
403(b) Investment Basics

Contributions to your 403(b) plan

Accessing your funds

Determining investment risks

Setting up a 403(b) plan

Roth 403(b)

Where to go for help and more information


403(b) Investment Basics
What is a 403(b) plan? Return to Top
       A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. It gets its name from the particular section of the Internal Revenue Code - section 403(b).

    Internal Revenue Service Publication 571  
 

What is the difference between a 403(b), 457 and a 401(k)?  
       Depending on your employer, you might have a different retirement savings plan. These plans share the same basic structure as 401(k)s: pretax contributions and tax-deferred earnings. The contribution limits are also the same. And the money you accumulate in one type of plan may be moved into any of the others (provided the new plan permits transfers). But these plans also have features that set them apart from 401(k)s.

Nonprofit organizations, educational institutions, religious institutions, and certain hospitals, may offer 403(b) plans. In a 403(b) your investment menu is limited to annuities - fixed or variable and in some cases equity-indexed annuities (EIAs) - or mutual funds. Your employer may choose to match your contributions, but that practice is less common than with 401(k)s. But if there is a match, you usually have immediate vesting, or the legal right to all contributions and their earnings. That differs from 401(k) plans, where it might take up to six years to fully vest.

State and local governments (and some local school districts) typically offer 457 plans, also called deferred compensation plans. Rather than belong to you, your assets are held in trust for the duration of your employment. Not all of the same rules for early withdrawal penalties and minimum required distributions that apply to 401(k)s apply to 457s. And while you can use the same guidelines for catch-up contributions as apply to the other plans, 457s have a catch-up system of their own. You can contribute to a 457 even if you have made maximum contributions to a 403(b) or 401(k).


    Financial Industry Regulatory Authority, Inc.  
 

Who is eligible to participate in a 403(b) plan?  
       The following are eligible to participate:
  • Employees of tax-exempt organizations established under section 501(c)3 of the Internal Revenue Code.
  • Employees of public school systems who are involved in the day-to-day operations of a school.
  • Employees of cooperative hospital service organizations.
  • Civilian faculty and staff of the Uniformed Services University of the Health Sciences (USUHS).
  • Employees of public school systems organized by Indian tribal governments.
  • Certain ministers.


    Internal Revenue Service Publication 571  
 

What are the benefits of a 403(b) plan? Return to Top
       There are three benefits to contributing to a 403(b) plan:
  • You do not pay tax on allowable contributions in the year they are made. You do not pay tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions are either excluded or deducted from your income.
  • Earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them.
  • You may be eligible to take a tax credit for elective deferrals contributed to your 403(b) account. For more details, see chapter 10 of the Internal Revenue Service Publication 571.


    Internal Revenue Service Publication 571  
 

Are there any 403(b) plans that do not charge a fee?  
       All investment products include fees that the investor pays the company that offers the product. California Education Code, section 25101 et seq. requires all companies selling 403(b) products to California public school employees to disclose all fees for each of their products on this site.

    California Education Code, Section 25101  
 

Will my participation in a 403(b) plan reduce my Social Security benefit?  
       Your participation in a 403(b) plan will not affect your Social Security benefit.

    Social Security Administration  
 
Contributions to your 403(b) plan
How much can I contribute to my 403(b) account annually? Return to Top
       There are limits on the amount of contributions that can be made to your 403(b) account each year. If contributions made to your 403(b) account exceed the contribution limits, penalties may apply.

Chapters 2 through 6 of the Internal Revenue Service Publication 571 provide information on how to determine the amount that can be contributed to your 403(b) account. Worksheets are provided in chapter 9 to help you determine the maximum amount that can be contributed to your 403(b) account each year.


    Internal Revenue Service Publication 571  
 

Can I stop contributing altogether?  
       You are allowed to stop contributing to a 403(b) plan. However, if you withdraw your money prior to normal retirement age, you may be subject to additional taxes and fees. The details of your selected 403(b) plan should define any fees for early distribution. Internal Revenue Service Publication 575 provides more specific information on taxes on early withdrawal.

    Internal Revenue Service Publications 571 and 575  
 

May I make contributions to my 403(b) plan after I retire?  
       Only your employer is permitted to make contributions after you retire. Post-retirement employer contributions are permitted for up to five years after your severance from employment. The amount of your employer's contribution will be based on your compensation during your final year of service.

    Internal Revenue Service  
 

Why should I also contribute to a 403(b) plan if I am already vested in a retirement pension plan? Return to Top
       A 403(b) plan allows you some flexibility and control in choosing your own investments. The money deposited into your 403(b) plan is deducted from your normal pay. California school employers offer 403(b) plans as a supplement to -- rather than a replacement for -- defined benefit pensions. In other words, a 403(b) plan may provide you an additional source of retirement income.

    Financial Industry Regulatory Authority, Inc.  
 

What is a "catch-up contribution"?  
       The most that can be contributed to your 403(b) account is the lesser of your limit on annual additions or your limit on elective deferrals. If you will be age 50 or older by the end of the year, you may also be able to make additional catch-up contributions. These additional contributions cannot be made with after-tax employee contributions.

You are eligible to make catch-up contributions if: You will have reached age 50 by the end of the year, and the maximum amount of elective deferrals that can be made to your 403(b) account have been made for the plan year.

The maximum amount of catch-up contributions is the lesser of $3,000 for 2011, or your includible compensation minus your other elective deferrals for the year. Note: if you have more than 15 years of Service, the limit on your elective deferrals is increased. Learn more about the "15-Year Rule" in Chapter 4 of Internal Revenue Service Publication 571.

Internal Revenue Service Publication 571 provides more details on catch-up in chapter 6 and a worksheet to help you figure your limit on catch-up contributions in chapter 9.


    Internal Revenue Service Publication 571  
 

Does my employer's 403(b) plan have to provide for the catch-up?  
       It is not mandatory that the employer provide for a catch-up. However, if an employer maintains more than one elective deferral plan (403(b), 457, 401(k)), and one plan allows for a catch-up, then all plans must allow for a catch-up.

    Internal Revenue Bulletin 2003-37  
 
Accessing your funds
Can I access my 403(b) investment funds if necessary? If so, what is the cost of accessing funds before retirement? Return to Top
       Yes. Distributions from qualified retirement plans and nonqualified annuity contracts made to you before you reach age 59 1/2 may be subject to an additional tax of 10%. Internal Revenue Service Publication 575 provides more information on "Tax on Early Distributions", including a list of exceptions.

    Internal Revenue Service Publication 575  
 

What do I do if I change employers?  
       You can rollover, tax free, all or any part of a distribution from an eligible retirement plan to a 403(b) plan. Additionally, you can rollover, tax free, all or any part of a distribution from a 403(b) plan to an eligible retirement plan. The following are considered eligible retirement plans: Individual Retirement Arrangements (IRA), qualified retirement plans (to determine if your plan is a qualified plan, ask your plan administrator), 403(b) plans and government eligible 457 plans. More information on eligible retirement plans is available in Internal Revenue Service Publication 575.

    Internal Revenue Service Publication 575  
 

How do I roll into or out of a 403(b) plan?  
       If you withdraw cash or other assets from a qualified retirement plan in an eligible rollover distribution, you can defer tax on the distribution by rolling it over to another qualified retirement plan or traditional Individual Retirement Arrangement (IRA). You do not include the amount rolled over into your income until you receive it in a distribution from the recipient plan or IRA without rolling over that distribution. If you rollover the distribution to a traditional IRA, you cannot deduct the amount rolled over as an IRA contribution.

    Internal Revenue Service Publication 575  
 

Can I roll a portion of my 403(b) plan into an Individual Retirement Arrangement (IRA)? Return to Top
       A rollover from a 403(b) plan to an IRA may be permitted if there has been a distributable event. A distributable event would include death, disability, separation from service, hardship or attainment of age 59 ½. Internal Revenue Service Publication 575 provides more details.

    Internal Revenue Service Publication 575  
 

What is a hardship withdrawal?  
       A hardship withdrawal occurs when you take money out of your 403(b) plan or other qualified retirement savings plan to cover a pressing financial need. You must qualify to withdraw by meeting the conditions your plan imposes in keeping with Internal Revenue Service (IRS) guidelines. If you're younger than 59 1/2, you may have to pay a 10% penalty, plus income tax, on the amount you withdraw, and you may not be permitted to contribute to the plan again for a period of time. Contact your tax professional and 403(b) provider for details specific to your situation and particular 403(b) plan.

    Financial Industry Regulatory Authority, Inc.  
 

How will distributions from my 403(b) plan be taxed after I retire?  
       In most cases, the payments you receive, or that are made available to you from a 403(b) plan are taxable in full as ordinary income. In general, the same tax rules apply to a distribution from a 403(b) plan that apply to distributions from other retirement plans.

These rules are explained in Internal Revenue Service Publication 575. Publication 575 also explains the additional tax on early distributions from retirement plans.


    Internal Revenue Service Publication 571  
 

Can I leave my money in the plan indefinitely? Return to Top
       You must receive all, or at least a certain minimum, of your interest accruing after 1986 in the 403(b) plan by April 1 of the calendar year following the later of the calendar year in which you become age 70 ½ or the calendar year in which you retire. Check with your employer, plan administrator, or provider to find out whether this rule also applies to pre-1987 accruals. If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach age 75 or April 1 of the calendar year following retirement, whichever is later. For each year thereafter, the minimum distribution must be made by the last day of the year. If you do not receive the required minimum distribution, you are subject to a nondeductible 50% excise tax on the difference between the required minimum distribution and the amount actually distributed.

Internal Revenue Service Publication 575 provides more information on minimum distribution requirements and the additional tax that applies if too little is distributed each year.


    Internal Revenue Service Publication 571  
 
Determining investment risks
What are the risks associated with investing in a 403(b) plan? Return to Top
       For most people, risk means a possible loss of principal. But the risk of investing in insured products introduces the possibility that your rate of return won't outpace the rate of inflation. In other words, your account balance might increase over time, but your buying power might decrease anyway. Risks tend to be cyclical, with one risk posing a serious threat in some periods but very little in others.

    Financial Industry Regulatory Authority, Inc.  
 

How do I determine my own tolerance for risk?  
       Ideally, your investing style will provide the growth you need at a level of risk with which you're comfortable. But both your needs and risk tolerance change as you age - and as external factors, such as the economic climate and the performance of your other retirement assets, fluctuate.

Financial Industry Regulatory Authority, Inc. (FINRA) provides a calculator which will allow you to compare allocation strategies for aggressive, moderate and conservative portfolios.


    Financial Industry Regulatory Authority, Inc.  
 

Why is asset allocation important?  
       One of the strongest arguments for asset allocation is that stocks and bonds tend to react differently to different economic climates. If you have some of your money in each asset class, you may be able to moderate your losses without giving up too many potential gains.

    Financial Industry Regulatory Authority, Inc.  
 
Setting up a 403(b) plan
How do I begin investing in a 403(b) plan? Return to Top
       If you opt to manage your own 403(b) accounts, you can open an account by contacting the vendor of the product you wish to invest in. You must also submit a Salary Reduction Agreement to your school employer.

If you opt to use an advisor, then in most cases, the advisor will take care of establishing the account and submitting the Salary Reduction Agreement to your employer.


    Internal Revenue Service Publication 571  
 

What 403(b) provider can I invest with?  
       You can invest with any 403(b) provider that is registered with this site. Your employer may have a list of vendors that they have approved. If the investment company you would like to invest with is not on your employer's approved list, you may request that your employer add the company to their list. The process to add vendors will vary by employer.

    California Education Code, Section 25114  
 

How do I know which 403(b) investment options are available from my employer?  
       Some employers provide their list of "Approved Vendors" on this site. Otherwise, you can ask your employer to provide you with a copy of your district's list.

    403bCompare.com  
 

Where do I get a Salary Reduction Agreement form? Return to Top
       Your employer can provide you with a blank copy of a Salary Reduction Agreement. You may also retrieve it from 403bCompare if your employer provides the form on this site.

    403bCompare.com  
 

What if my current 403(b) provider isn't on this Web site?  
       If your 403(b) provider is not on this site, it most likely means they have not registered with 403bCompare. The provider will not be able to sell new 403(b) plans in the state of California, but the law allows unregistered providers to continue to receive contributions from employees who had an agreement in place prior to the implementation date. Providers can register on 403bCompare every year from May through June.

    California Education Code, Section 25113  
 

How can I find an adviser to assist me with my investment planning?  
       Some financial planners and investment advisers offer a complete financial plan, assessing every aspect of your financial life and developing a detailed strategy for meeting your financial goals. They may charge you a fee for a plan, a percentage of your assets that they manage, or receive commissions from companies whose products you buy, or a combination of these. You should know exactly what services you are getting, how much they will cost, and how your investment professional gets paid.

Smaller investment advisers are generally regulated by states. You can find more information at the California Department of Corporations Web site.

Brokers make recommendations about specific investments like stocks, bonds or mutual funds. Brokers are generally paid commissions when you buy or sell securities through them.

You can research your prospective or current broker online through the Financial Industry Regulatory Authority, Inc. (FINRA) Web site or the California Department of Corporations.


    US Securities and Exchange Commission  
 
Roth 403(b)
What is a Roth 401(k) or 403(b) contribution? Return to Top
       Prior to January 2006, participants in a 403(b) or 401(k) plan could only make traditional elective contributions with pretax dollars - not subject to income taxes when made. Taxes on the accumulation are deferred until money is withdrawn from the account, at which time the withdrawn amount is subject to income taxes. Now participants may also make a "Roth" elective contribution, which is made after income taxes are withheld. The interest and earnings withdrawn from a Roth Account are tax-free if the distribution is considered "qualified."

    403bCompare.com  
 

What is a "qualified" distribution?  
       A qualified distribution is one that meets the following conditions: The distribution occurs at least five years after contributions are first made to the Roth account, and the participant attains age 59½, dies or becomes disabled.

    403bCompare.com  
 

What if I receive a Roth distribution before it is considered "qualified"?  
       If a distribution is not "qualified," then the earnings and interest are subject to taxation and possible early distribution penalties. However, taking a partial distribution prior to being qualified does not disqualify remaining funds in your Roth account from being "qualified" in the future.

    403bCompare.com  
 

How much can I contribute to a Roth? Return to Top
       Roth contributions: Count toward the annual dollar limit on elective contributions, meaning they are combined with all pretax contributions made to any 401(k) or 403(b) plan and cannot exceed the IRC 402(g) limit of $16,500 in 2011. Are also subject to the age-50 catch-up contribution limit ($5,500 in 2011) and any 403(b) special catch-up limits.

    403bCompare.com  
 

Is there an Adjusted Gross Income (AGI) limit to be eligible to make a Roth contribution?  
       No, unlike the Roth IRA, there are no AGI limits associated with Roth 403(b)/401(k) contributions. The only stipulation is that the participant must meet the eligibility requirements of the 401(k) or 403(b) plan.

    403bCompare.com  
 

What affect does the Roth contribution have on a Roth IRA?  
       None. A participant can contribute up to the maximum amounts allowed to both a Roth 401(k) or 403(b) and a Roth IRA, if eligible.

    403bCompare.com  
 

Can my pretax 401(k) or 403(b) accounts be converted to a Roth account? Return to Top
       No. While it is possible for a "traditional" IRA to be converted to a Roth IRA, no conversions are available for pretax 401(k) or 403(b) accounts to a Roth account.

    403bCompare.com  
 

Are Roth accounts subject to Required Minimum Distribution (RMD) rules?  
       Yes. Generally, all 401(k) and 403(b) accounts, including Roth accounts, are subject to the RMD rules. They are subject to begin at the later of age 70½ or separation from employment from the employer sponsoring the plan. They're also subject to plan provisions. However, Roth accounts may be rolled over to a Roth IRA, which is not subject to the RMD rules, prior to the required beginning date.

    403bCompare.com  
 

Can I roll my Roth account to other plan types?  
       Yes. In addition to being able to roll over to a Roth IRA, Roth accounts can be rolled over to other Roth 401(k) or 403(b) accounts in plans that will accept them.

    403bCompare.com  
 

Can I borrow against my Roth account? Return to Top
       Yes. Subject to plan provisions, loans are possible from Roth accounts.

    403bCompare.com  
 

Who might Roth accounts appeal to?  
       Roth accounts might appeal to those who: Cannot contribute to a Roth IRA due to Adjusted Gross Income limits. Are young, might currently be in a lower tax-bracket and have a long time frame for tax-free growth. Are financially stable but view tax hikes as inevitable and paying taxes now might help alleviate future tax burdens. Want tax diversity and flexibility in retirement to determine whether a distribution is more advantageous as taxable or tax free.

    403bCompare.com  
 
Where to go for help and more information
How do I get help beyond the 403bCompare site? Return to Top
       403bCompare.com is just one of many tools available to you in learning about 403(b) investments. For your convenience, we provide links to additional information.

    403bCompare.com  
 

How do I find out whether an investment broker or adviser ever had problems with a government regulator or has a disciplinary history?  
       Start by going to the US Securities and Exchange Commission Web site and the Financial Industry Regulatory Authority, Inc. Web site. Both sites provide valuable information on how to find out if a broker or adviser is properly licensed or registered, whether they have had any run-ins with regulators, or if they have received any complaints from investors.

The California Department of Corporations may also have information on complaints against companies. They can be contacted at (866) 275-2677 or 866 ASK CORP.


    US Securities and Exchange Commission  
 
 
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