What’s in Your 403(b)?

Do you work for a non-profit organization, school system, or religious sector? Then you probably have a retirement plan established under section 403(b) of the internal revenue code. This section exempts these employers from some of the administrative requirements of other plans.

For those 50 years and over, the original maximum contribution of $19,000.00 was increased by $6,000.00 in 2019. If you have a 401(k), that $6,000.00 catch-up contribution is for both plans. Some 403(b) plans allow for an additional $3,000.00 if you work with the employer for at least 15 years. Employees 50 years and over who’ve contributed less than $5,000.00 per year are allowed an additional $15,000.00 in lifetime contributions per year. Catch-ups are meant to assist older employees to make up for any lost time.

Whether you have an IRA, 401(k), or 403(b), you probably have not saved enough for retirement. Many employees believe the 403(b) is less expensive for the investor than a 401(k) or IRA—this is not necessarily true. Certain annuities or mutual funds in your 403(b) may add additional charges that may not be reflected on your statement. Check with your HR officer or plan administrator for details.

Many 403(b) plans may offer a variable annuity as an investment choice, and some plans make automatic contributions to these annuities. A variable annuity is an investment in a variety of mutual funds. By nature of its name, your account may fluctuate. Don’t like the variability? You may choose a fixed interest rate account or a combination of both.

In retirement, you’ll probably want to convert your account into an income stream. This means you’ll have to forfeit the lump sum, but you won’t actually lose the money. In return, you get units assigned to you. Though the number of units you receive will never change, the value of each unit will. Each month you may receive a different amount on your annuity check. Don’t forget that all contributions and growth were tax-deferred, meaning the withdrawals will be subject to tax.

Variable annuities are not your only option in a 403(b). Consider mutual funds and target-date programs that auto-invest depending on your retirement date goal. Your employer and plan administrator will decide what’s available to you. Many employees contribute the max employer match and then work with an advisor to enhance their retirement savings. Some choose programs that have tax deferrals but more robust investment choices.

A benefit of the 403(b) is employer matching funds, which is essentially free money. Take advantage by matching their maximum contribution. Is your 403(b) full vested? Essentially, is your employer’s match 100% yours? Some companies don’t vest until 1 or 2 years of employment. No matter your company’s vesting status, your contributions are always 100% yours even if the employer match takes time. Once your plan is fully vested, you may rollover your 403(b) to an IRA or transfer to a new 403(b) at a new job.

Another benefit of the 403(b) is the tax-deferred contributions, meaning you can reduce your current taxable income and potentially fall into a lesser tax bracket. Because the growth is tax-deferred, you won’t have to touch it until retirement. But you will be growing a future tax bill that must be paid in retirement. You’ll be required to take RMDs at age 70 & ½ or 72 come January 1st, 2021. If you have any post-tax contribution accounts, such as a ROTH, you can steer clear of RMDs. Plan on leaving some or all your retirement account to your heirs? They’ll also be subjected to RMDs under a variety of IRS regulations.

No discussion of a 403(b) is complete without mentioning the TIAA CREF, or the Teacher’s Insurance & Annuity Association College Retirement Equities Funds. Most teachers, librarians, and university professors have this plan. The TIAA, or annuity part of the 403(b), is offered and backed by the private company, Teacher’s Insurance and Annuity Associate of America, or TIAAA. TIAAA guarantees at least principal plus growth according to the guaranteed interest rated specified in your contract.

Now that you know what’s in your 403(b), do you know what to do with it? Whether you’re retired or nearly there, making the most of your savings is crucial. At RGA, we meet many people with different backgrounds, lifestyles, and needs. Our holistic approach helps ease the stress of retirement planning, so you don’t have to do any heavy lifting. Want to know more? Click the link below, call 1-800-467-8152 or email info@ronaldgelok.com to schedule a complimentary consultation.

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