403 (b) Retirement Plan

403(b) plans are offered to employees of nonprofit institutions such as schools or hospitals.

403(b) plans are offered to employees of nonprofit institutions such as schools or hospitals. These plans are also referred to as TSAs, tax sheltered annuities. A 403(b) is an agreement between the employee and the 403(b) provider, and all the employer does is withhold contributions for the employee and forward them to the provider. No one is minding the store here because the employee takes on no responsibility except to transfer the employee's money to the chosen provider.

Originally, only annuities were used for these plans, but today, you can find good mutual fund choices as well. And you should be looking for the mutual fund choices! The contribution limits for the employee is the lesser of 20 percent or $10,500. The $10,500 limit will be indexed to the cost of living, The employee and employer combined contributions cannot exceed the lesser of 25 percent or $30,000.

Your account is allowed to compound tax deferred, so the same rules apply here as in other qualified retirement plans. A 10 percent penalty will usually be levied if you take your money out before age 59 1/2. Upon a job change, you should be able to roll your 403(b) into an IRA, but check the fine print because some annuities have a backend surrender charge, and even if the regulations allow a rollover, they don't. Withdrawals usually must begin at age 70 1/2.

403(b) plans have a catch-up election, allowing participants who did not take advantage of earlier contribution levels to "catch up" and put away extra money. The IRS rules are very complicated, so you'll need to get some help from the plan provider. You are recommend to checking out the IRS publication 571, "Tax-Sheltered Annuity Programs for Employees of Public Schools and Certain Tax-Exempt Organizations."

You should be able to invest your 403(b) anywhere that will accept your account. The IRS ruled in 1990 that participants in a 403(b) can transfer out of their plan into mutual funds of their choice using a 403(b)(7). This does not require a change of jobs. Only the accumulated savings can be transferred, and there may be surrender charges if you are transferring out of an annuity. You would make this change to get better choices for you account.

Your plan administrator may not know or understand 403(b)(7) plans. Transferring your account may not be easy, but it will be worth the effort if your choices are better.

Participants in 403(b) plans should have choices, and those choices should include mutual funds. School districts and hospitals can make it very difficult or even impossible for participants to use another source other than the one recommended. Petition your employees wanting a new provider for your employer to include it on the list.