403(b)s – The Ins and Outs and Some Know-How

403(b)s are a great investment vehicle for retirement for those who work for K-12 public school districts, colleges, universities, libraries, hospitals, churches, etc., and they have some interesting features that can make them very advantageous.

Here are some of the benefits of a 403(b):

  • You can contribute $17,500 for 2013; if you’re over age 50, you can contribute $23,000 for 2013
  • Contributions to the traditional 403(b) plan are done on a pre-tax basis through salary reductions, and are tax deductible
  • There is a 15-year rule of service that employers can offer (NOT required on their part) employees who have not contributed an average annual amount of $5,000/yr. – this would allow you to make an additional contribution of $3,000/yr. up to a lifetime maximum catch up of $15,000
  • If your employer offers a Roth 403(b) option (NOT required on their part), there are no income restrictions to making contributions as there are in a Roth IRA, plus your 403(b) contribution limit of $17,500/yr. is much higher than the current Roth IRA contribution limit (only $5,500/yr.) so you can save more. One drawback: the Roth deferrals are NOT tax deductible, but your withdrawals in retirement are TAX-FREE

    [Read: Tax-Saving Withdrawal Strategies for Retirement]
  • Your savings grow tax-free, and you only pay taxes after taking distributions from a traditional 403(b) in retirement (past age 59-1/2); your Roth 403(b) withdrawals in retirement are distributed TAX-FREE also
  • You can take loans against your 403(b) plan if your employer allows it (NOT required on their part)

There are also some possible disadvantages with 403(b)s though:

  • Often these 403(b) plans have vendors which charge high expenses (often from annuity providers), when an open platform where you can pick better and lower-cost mutual fund options would be best for most of the employees
  • Sometimes there is a lack of quality 403(b) choices for you to invest in (either too expensive, not enough investment options, etc.) and it can take some legwork to get quality vendors into certain school districts or employers (depending on the rules of each employer)
  • The loan provisions are very strict and can impose some serious penalties equating to early withdrawal if you miss even one loan payment

Find an experienced 403(b) financial advisor who works for an RIA firm, earns his/her money from fees (NOT commissions), believes in having an abundance of investment choices for clients, and has the heart and demeanor of a teacher, NOT a salesman, and chances are you’ve found the right 403(b) financial advisor to help you and/or your employees prepare and plan for retirement.

To learn more about Martin Federici view his Paladin Registry profile.

Other posts from Martin Federici, Jr.

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