Is a 403 (b) a Qualified Retirement Plan?
A qualified retirement plan is an employer plan that benefits employees and meets specific requirements of the Internal Revenue Code. These plans may be eligible for special tax benefits, such as tax deferrals for company contributions. Your contributions may also qualify for a tax deferment. Saving for retirement can be tricky because we have so many personal financial priorities, such as increasing short-term savings, paying off debts, and simply covering everyday expenses. The good news is that there is the Saver’s Credit, a little-known tax credit that the Internal Revenue Service (IRS) makes available to eligible taxpayers. You can reduce your federal taxes by saving through a qualified retirement plan, such as a 403 (b) plan, or an Individual Retirement Account (IRA).
What is the 403 (b) plan?
A 403 (b) plan is a type of retirement plan that offers tax protected accounts for specific groups of eligible people. Employees who work in public schools, nonprofits, and other tax-exempt organizations are generally eligible for 403 (b) plans. If you work for a government agency or non-profit organization, you will not have the option of having a 401 (k) account. However, you may have a plan called 403 (b) . Participants in this plan include school, government, nurses, doctors, and librarians, among others. This plan works similarly to the 401 (k) plan, both having the same contribution limits.
What’s the difference between a 401 (k) and a 403 (b) plan?
Both the plans, 401 (k) and 403 (b) are designed to help employees save for retirement. The major difference of both the plans is that 403 (b) plans are only available to specific people who work in tax-exempt organizations. Administrative costs for 403 (b) plans tend to be lower in many cases.
What are the Benefits of 403 (b) Plans?
There are many reasons why the employees like 403 (b) plans for their retirements. It all comes down to the great benefits that 403 (b) plans have to offer.Some of the benefits of 403 (b) plans include:
- Growth and capitalization of tax-deferred savings.
- Decrease in taxable income.
- Contributions can be made automatically through a payroll check.
- Some early withdrawal options may be exempt from fines.
- Some employers offer equalization of contributions with the 403 (b) plan.
- May have Roth 403 (b) options available.
Depending on the details of the 403 (b) plan, there are additional benefits that may be part of the plan. You may have the option of purchasing additional years of tax-free service credits or making contributions to catch up after reaching a certain age or having worked for a number of years. Review your plan details to make sure you’re making the most of your 403 (b) benefits.
What is the Annual Contribution Limit for 403 (b) Plans?
Your total contribution for one year is based on your annual salary multiplied by the percentage you contribute. Your annual contribution limit is dependent on some of the limits per year as defined by your 403(b) plan. The maximum annual amount for 2020 is $ 19,500. If you are 50 years of age or older, a new catch-up provision allows you to contribute even more to your 403 (b). Starting in 2020, employees age 50 and older can deposit an additional contribution of $ 6,500 into their 403 (b) account. This amount is indexed to inflation after 2020.One important point which needs to be mentioned here is that some of the employees such as “Highly compensated” employees may incur other forms of contribution limits for their retirement plan. Employees classified as ‘Highly Compensated’ may be subject to contribution limits based on total employer participation in the 403 (b) plan. If you expect your salary to be above $ 120,000, you may need to contact your employer to see if these additional contribution limits apply to you.
What are the Tips to Get the Most out of Your 403 (b) Plan?
Like any retirement plan, it’s best to start early to get the most out of the 403 (b) account. Even if you don’t contribute much at the beginning of your career, even small contributions now can have a great impact in the future. Also, always take advantage of any type of employer contribution matching program that is available to you. If your employer is willing to match contributions, it’s free money! Do not miss it.