Spokes Kids

403(b) FAQ


Information provided should not be considered as tax advice. Please consult with your tax professional.

1. What is a 403(b) plan?
The 403(b) plan is a tax deferred retirement savings plan much like a private company 401(k) plan. 403(b) plans are available to employees of public schools. The names refer to the section in the Internal Revenue Code.

2. What does tax-deferred mean?
Your contributions are deducted from your paycheck before taxes, thereby reducing your taxable income, which may reduce the federal and state income tax you pay each year. These deductions are still subject to FICA (Social Security) tax. Your balance and investment earnings grow tax deferred until you take the money out at retirement. At that time both your contributions and earnings are taxed as income.

3. Why contribute to a 403(b) when you already have a pension?
A 403(b) plan can supplement your pension. Most pension plans, even when combined with Social Security benefits, may not provide enough to make it through retirement, especially with growing health care costs.

4. Will contributions to my 403(b) plan reduce my Social Security benefits?
No. Your 403(b) contributions do not reduce wages for the purpose of determining Social Security benefits.

5. Is there a tax credit if I have a low salary?
Yes. If you participate in your 403(b) plan or other eligible retirement plan, you can receive a tax credit of up to 50 percent on your contributions (up to $2,000). In 2016, eligibility for the credit is based on your Adjusted Gross Income (AGI). Please check with a tax advisor to determine if you are eligible.

6. Why would I want to deposit my 403(b) funds with my previous employer or previous investment provider into my new plan?
You may wish to exchange or transfer money for a variety of reasons: loan provisions, more varied fund selection, lower fund expenses, better fund performance, etc.

7. Can I invest with a vendor of my choice?
In order to participate in the 403(b) plan, you must invest with one of your employer’s approved vendors.

8. How much can I contribute?
For 2016, you can contribute up to $18,000. If you are 50 or older at any time during 2016, you can contribute an additional $6,000. If you have completed 15 years of service with the same employer and you did not contribute more than an average of $5,000 to a 403(b) in the previous years, you may be able to increase your contributions an additional $3,000 per year (up to a $15,000 lifetime maximum) if your district’s plan document allows it.

9. Can I change the amount I contribute toward my 403(b) retirement plan?
Each employer has a unique plan. Some employers allow you to change your contribution at anytime, yet some employers restrict it to quarterly or yearly. Please contact your plan administrator.

10. Can I stop contributing altogether?
You may stop contributing at any time.

11. What if I have a financial crisis and need the money?
A “Hardship Withdrawal” is allowed in most plans if you are under severe financial distress and have no other resources available. 403(b) withdrawals come with a 10% IRS penalty. Other restrictions may apply. Some plans also allow you to take out a loan against your balance in certain circumstances. See your plan administrator for details.

12. Can I rollover or withdraw my 403(b) account if I leave employment with the district?
Yes. Your money is always 100% yours and can be rolled over into your new retirement plan when you leave employment. If you withdraw your money, taxes will be due on the distribution and there may be an IRS pre-mature distribution penalty if you are not age 55 when you separate from service.

If you change jobs, there are several options:

  • Transfer the money into your new employer's retirement savings plan
  • Roll it into an IRA
  • Leave it where it is
  • Take a lump sum payment (penalties, taxes and other fees may apply).

13. When can 403(b) money be accessed without penalty?
In most cases you can make a withdrawal from your 403(b) without incurring a penalty when you reach age 59 ½, if you retire at 55 (or later) or if you become disabled or die. If you retire before age 55, you may be eligible to receive a series of periodic payments.

14. What if I get a divorce?
A withdrawal and distribution to an "alternate payee" is permitted if all or part of the account is awarded to an ex-spouse by divorce judgment.

15. What happens to my 403(b) if I die?
Just like Life insurance, when you open your retirement savings plan, you will designate a beneficiary. There are different rules of disbursement depending upon whether the death occurs before or after age 70 ½.

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