Choosing a Retirement Plan: 403(b) Tax-Sheltered Annuity Plan
403(b) Tax-Sheltered Annuity plans are relatively unknown. That’s because only certain employers are allowed to have them. If you are:
- a public school, college, or university,
- a church; or
- a charitable entity tax-exempt under section 501(c)(3) of the Code
then read on. You are allowed to have a 403(b) plan.
Basically, 403(b) plans are similar to 401(k) plans that are maintained by "for-profit" entities. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by their employer (that would be you). This deferred money generally does not get taxed by the federal government or by most state governments until distributed. This is just as it is with 401(k) plans. If you establish a 403(b) plan, you can have other retirement plans and you may need to file Form 5500.
Pros and Cons:
- Flexibility in contributions.
- Only salary deferral plan available to public school employees.
- Investment options are fewer than under a 401(k) plan.
Who Contributes: Employee salary deferrals and Employer contributions.
Employee – Lesser of (a) $17,000 in 2012 and $17,500 in 2013 (subject to cost-of-living adjustments in later years), or (b) 100% of includable compensation. If the employee is age 50 or over, a "catch-up" contribution is also allowed. This additional catch-up contribution amount is $5,500 for 2012 and 2013 (subject to cost-of-living adjustments in later years).
Employer/Employee – The lesser of $50,000 in 2012 and $51,000 in 2013 (subject to cost-of-living adjustments in later years) or 100% of includable compensation. Note: The employee is still limited to the employee elective deferral limit ($17,000 for 2012 and $17,500 in 2013); the employer contributions can add up to another $33,000 (for 2012; $33,500 for 2013) for a total of $50,000 in 2012 and $51,000 in 2013.
Filing Requirements: Annual filing of Form 5500 may be required.
Participant Loans: Permitted.
In-Service Withdrawals: Yes, but subject to possible 10% penalty if under age 59-1/2.