403b Retirement

A 403b retirement plan is an alternative to 401k for employees who work in the public sector. Available to public school personnel, 501(c)(3) non-profit employees, civil workers and certain ministers, a 403b retirement plan gives you a tax-deferred start to your resource retirement plans even if you have no pension. Interest and capital gains can accumulate tax-free on your 403b contributions until you start to make withdrawals, giving you a bigger nest egg while putting you in a lower bracket when your funds are finally taxed.

How 403b Operates

A 403b retirement plan is easy to set up and maintain. In most cases, your employer must set up the plan for you, although there are some exceptions for self-employed ministers. Your primary 403b contributions are typically made through a salary deduction so you won't have to worry about making contributions yourself. Be mindful, however, that you will not have much flexibility in stopping or deferring payments, so be sure to create a budget around your new salary. Even if you are living on a lower everyday budget and struggle, you will thank yourself once you've secured a worry-free retirement. To make your 403b funds work even more in your favor, your employer can match your contributions up to 100 percent, although not every employer participates in matching. As with a private sector 401k plan, you are legally allowed to contribute up to $16,500 to your 403b as of 2010. If your employer matches your funds, the total amount contributed to your fund cannot exceed $49,000.

If You Are Nearing Retirement

A 403b retirement plan also allows you to make certain provisions to "catch up" if you are behind in building your retirement savings. The amount you are legally allowed to contribute to your 403b in a given year, called your Maximum Allowed Contribution (MAC), depends on your age, average yearly contribution and length of service at a single approved organization. For example, if you have worked for more than 15 years at a cooperative hospital and have contributed an average of less than $5,000 to your 403b retirement fund, you qualify for a Lifetime Catch-up, also known as the "15 year rule" in the IRS. A Lifetime Catch-up allows you to add $3,000 to your MAC for a total of $19,500. Keep in mind, however, that you cannot add a lump sum at will to a 403b retirement plan. Your employer must make deductions from your paycheck based on your input, meaning you must plan ahead for larger contributions. A few other stipulations also apply to a Lifetime Catch-up, including a maximum "catch up" amount of $15,000.

This isn't to say you don't have other options as you get older. As of 2011, if you will be at least 50 years old at the end of a given calendar year, you qualify for an the "50+ Catch-up," an additional contribution of $5,500 for a total of $22,000 each year. If you also qualify for Lifetime Catch-up at this time, your MAC will be $25,000. In other words, you can take advantage of both the 50+ and the Lifetime Catch-up at the same time.

Consider this example. Mrs. Smith is a 47-year-old high school principal who began working as a teacher 20 years ago at the same school. Mrs. Smith has contributed $400 a month to her 403b retirement plan over the last 10 years, an increase from the $200 a month she contributed when she started her employment. Now just 18 years from her target retirement age, Mrs. Smith realizes that she needs to start making the maximum contribution to her account if she wants to retire comfortably. Since her average annual contribution over the last 15 years has been less than $5,000, she can take advantage of the Lifetime Catch-up provision by requesting that the deductions from her monthly salary equal $19,500 a year. When Mrs. Smith reaches age 50, she'll only have caught up $9,000 through her Lifetime Catch-up contributions, so for the next two years she can have $25,000 deducted from her salary. After that, she is still eligible for the 50+ Catch-up amount of $22,000.

Even if you are getting a late start, setting up a 403b retirement plan is one of the simplest ways to build your retirement fund if you work in the public service sector, whether as a teacher, a minister, or as an employee of a non-profit organization. Putting aside even a small amount each month can lead to significant savings by the time you are ready to retire, thanks to compound interest rates and the varied investments tied to your account. Speaking with your employer and researching your options online can help you set up a 403b retirement plan that will help you build toward a stress-free future.

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