403(b) INFORMATION
What the 403(b) Is
The 403(b) is a tax deferred retirement plan available for certain employees of public schools and employees of certain tax-exempt organizations. If uncertain of your eligibility, consult your employer.
The 403(b) has often been referred to as a Tax Deferred Annuity (TDA) or a Tax Sheltered Annuity (TSA). This is a misnomer and gives the false impression that a participant must invest in annuity products. This is not true. Way back in 1974 Congress granted participants the ability to contribute directly in mutual funds when they added paragraph 7 to the code creating the 403(b)(7) custodial account. Throughout this site the term 403(b) is intended to mean all of the following: 403(b), 403(b)(7), TDA, and TSA. Ultimately, the 403(b) plan is a defined contribution plan (often called a DC plan), where the participant makes contributions and investment decisions, as opposed to a pension or defined benefit plan (often called a DB plan), where the employer makes all, or a majority of contributions and all of the investment decisions.
Why the 403(b) is Important
The 403(b) can be an excellent way to save money for retirement whether as a supplement to a traditional pension plan or other retirement plan(s), or as a stand-alone plan.
How the 403(b) Works
Employees set aside money for retirement on a pre-tax basis through a salary reduction agreement with their employer. Contributions and earnings on investments grow tax deferred until the time of retirement, when withdrawals are taxed as ordinary income.
What Tax Deferred Means
An employee in the 15 percent federal tax bracket would reduce their taxable obligation by 15 cents for each dollar contributed to a 403(b). In effect, a $1 contribution would only cost the participant 85 cents. Employees in higher tax brackets would reduce tax obligation by even more.
How Much Can Be Contributed
For 2008, employees can contribute $15,500 in regular contributions. For 2009, employees will be able to contribute $16,500 in regular contributions. The IRS refers to regular contributions as elective deferrals. A participant age 50 or older at any time during the year can contribute an additional $5,000 for 2008 or $5,500 for 2009.
403(b) Informational Links
Contact Information
- CalSTRS403bComply.com, (800) 943-9179 or (888) 892-7494
- Kevin Kirkpatrick, (916) 320-3073
- Patrick Bivins, (916) 414-1009