Essentials Of 403 B Plans Foreducators


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Learn About 403 (b) Plans

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Essentials Of 403 B Plans Foreducators

  1. 1. Essentials of 403 b plans Especially for Educators
  2. 2. Don’t FORGET THIS PARAGRAPH! <ul><li>Most teachers work an average of 28 years in the TRS system and retire receiving 67% of their three highest average income. </li></ul><ul><li>Making a simple 403 (b) contribution can help avoid this income gap </li></ul>
  3. 3. Can you live off of 67% of your salary? <ul><li>Will your Mortgage be paid off? </li></ul><ul><li>Will your transportation be paid off? </li></ul><ul><li>Can you reduce your recurring expenses….food, transportation, clothing, utilities, medical expenses and emergency expenses? </li></ul>
  5. 5. 403 (b) Benefits <ul><li>Easy to participate! </li></ul><ul><li>Defer current income taxation on contributions </li></ul><ul><li>Contributions made on a “Pre-Tax” basis </li></ul><ul><li>Salary Reduction to reduce taxable income base </li></ul>
  6. 6. How much can I defer? <ul><li>Limited to $16,500 (in 2009, higher limits in future years). Governed by IRS Sections 415 and 402(g) </li></ul><ul><li>If plan permits, for those age 50 and over, an additional $5,500 (in 2009, higher amounts applying in future years) elective salary deferral permitted. Can use age 50 for 403(b) and 457(b) in the same year. One catch-up allowed for 401(k) and 403(b) </li></ul>
  7. 7. 15 years of service or more? <ul><li>For those with 15 years or more of service at qualifying institution (same employer), up to an additional $3,000 elective salary deferral per year ($15,000 max lifetime). Prior year contributions may limit this amount. Employee eligible for both age 50 and 15-year catch-up. </li></ul>
  8. 8. Rollovers <ul><li>Permitted to an IRA, 401(a), 401(k), 457(b) public and other 403(b) plans that accept it. Not permitted to 457(b) private plans. </li></ul>
  9. 9. Accessing your money <ul><li>Availability of funds generally subject to: </li></ul><ul><li>403(b) Withdrawal Restrictions </li></ul><ul><li>Hardship </li></ul><ul><li>Death </li></ul><ul><li>Disability </li></ul><ul><li>Age 591/2 </li></ul><ul><li>Separation from service </li></ul>
  10. 10. 403(b) Tax Penalties on Early Withdrawals <ul><li>Withdrawals prior to age 591/2 generally subject to 10% federal tax penalty except: </li></ul><ul><li>Payment to IRS on account of federal tax levy </li></ul><ul><li>Qualified domestic relations order (QDRO) </li></ul><ul><li>Deductible Medical Expenses </li></ul><ul><li>Disability </li></ul><ul><li>Death </li></ul><ul><li>Withdrawals prior to age 591/2 generally subject </li></ul><ul><li>to 10% federal tax penalty except: </li></ul><ul><li>Separation and selection of substantially equal periodic payments over the life expectancy of the participant and a beneficiary, for five years or until the participant attains age 591/2, whichever is later </li></ul><ul><li>Separation from service at age 55+ </li></ul>
  11. 11. 403(b) Taxability Pre- Tax Contributions Subject to minimum distribution rules at age 70½ Taxed as ordinary income when withdrawn* Tax deferred earnings
  12. 12. Selecting a Retirement Plan Provider <ul><li>Fund Expenses, Charges, Fees </li></ul><ul><li>Reputation </li></ul><ul><li>Experience </li></ul><ul><li>Expenses </li></ul><ul><li>Flexibility </li></ul><ul><li>Annuity Choices and Riders </li></ul><ul><li>Service </li></ul><ul><li>Expenses </li></ul><ul><li>Company Ratings </li></ul><ul><li>Mutual Funds & </li></ul><ul><li>Investment Choices </li></ul>
  13. 13. 403 (b) Minimum Distribution <ul><li>Federal law requires that most retirement and/or Tax-Deferred Annuity plan participants start taking minimum distributions by April 1 following the year they retire — or the year they reach age 70½, whichever comes later. </li></ul><ul><li>Any plan participant's actual required minimum distribution depends on his/her actual accumulation and life expectancy factor from the Uniform Table in the Internal Revenue Code. Alternatively, it can be calculated on the life expectancy of the employee and a beneficiary. If the employee selects the dual life expectancy, the minimum payment required will be smaller and more of the accumulation will remain in the plan where it will continue to be tax deferred. </li></ul>
  14. 14. 403 (b) Minimum Distributions <ul><li>Under annuities issued to employees participating in a 403(b) retirement plan, only contributions and earnings credited after 1986 are subject to minimum distribution rules. </li></ul><ul><li>Contributions and earnings credited before 1987 are excluded. Pre-1987 accumulations are called grandfathered amounts. </li></ul><ul><li>Ordinarily employees don't have to begin receiving payments from the pre-1987 accumulation until the year they reach age 75. Any amounts accumulated under qualified plans, such as 401(a), 403(a), and 401(k) plans, are not grandfathered regardless of the year when originally contributed </li></ul>
  15. 15. When you decide to withdraw… <ul><li>On the happy day of retirement there are ways to handle taxation </li></ul><ul><li>Withhold a percentage of the minimum distribution option (MDO) payment…up to 99 percent  </li></ul><ul><li>Elect no withholding </li></ul><ul><li>Elect the standard 10 percent withholding. </li></ul><ul><li>Withhold a flat dollar amount, but no more than the MDO payment itself. </li></ul>
  16. 16. Many desirable choices to take your income <ul><li>Interest only payments from your principal </li></ul><ul><li>Living benefit options </li></ul><ul><li>Annuitize your balance </li></ul><ul><li>Annuitize a portion of your balance </li></ul><ul><li>Organize equal payments for a set period of time (by % or $ amount) </li></ul>
  17. 17. Tax Incentive Means Greater Savings For You! Note that Mary brings home $25.00 more than John. Over 20 years and 24 pay periods per year Mary is able to bring home$12,000.00 more than John. $ 0.00 $ 25.00 Tax Savings $1,535.34 $1,560.34 Net Pay $ -100.00 $ 0.00 After Tax Savings $ -236.66 $ -211.66 Taxes Due $1,872.00 $1,772.00 Taxable Income $ -0.00 $ -100.00 Before Tax Savings $ -128.00 $ -128.00 TRS $2,000.00 $2,000.00 Gross John Mary
  18. 18. Understanding the Significance of Tax Deferral
  19. 20. PLSO Partial Lump Sum <ul><li>How will PLSO distributions be taxed? </li></ul><ul><li>Your PLSO distributions are subject to federal income tax withholding. Since these payments have been identified as eligible rollover distributions, TRS must withhold 20 percent for income tax unless the eligible portion is rolled over into an eligible plan. To defer paying taxes on these payments, you may roll over all or a portion of the entire &quot;eligible rollover distribution&quot; amount to an eligible employer plan. For additional information on this topic, please contact your tax consultant or the Internal Revenue Service at 1-800-829-1040 </li></ul><ul><li>I’d like to obtain the largest possible PLSO distribution available to me. Since such distributions enable me to receive advance payment of my monthly annuity, how many months worth of payments could I receive? </li></ul><ul><li>Members may select a partial lump-sum distribution not to exceed an amount equal to 36 months of a standard service retirement annuity. When you apply for a distribution, your annuity will be actuarially reduced to reflect that distribution and will be computed so that no actuarial loss results to TRS. In addition to 36 months, you have two other options for receiving payments covering 12 months and 24 months of your standard annuity </li></ul>
  20. 21. For Variables and Mutual Funds <ul><li>Dividends and Capital Gains </li></ul><ul><li>Fixed Percentage </li></ul><ul><li>Collared Withdrawals </li></ul><ul><li>Total Return with Systematic Withdrawals </li></ul><ul><li>Dividends and Interest </li></ul>
  21. 22. Fixed Accounts Withdrawals <ul><li>Fixed Percentage </li></ul><ul><li>Interest Only </li></ul><ul><li>Set Dollar Amount </li></ul>