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Section 403(b) plans are only available to employees at public education and 501(c)(3) tax exempt organizations.

Public Education employees include teachers, school administrators and other non-academic positions held within the school system, while 501(c)(3) participants would be employed by colleges and universities, certain charitable institutions, hospitals and nursing homes.

403(b) plans are commonly referred to as "Tax Deferred Annuities" and therefore, are generally purchased through an insurance company in the form of a Fixed, Variable or Equity Linked annuity plan.

As with most tax-qualified plans, they share the commonality of voluntary salary reduction, pre-tax contributions, tax deferred accumulation until withdrawn .

Annual Contribution Limits

Currently, the Internal Revenue Code applys two (2) limits:  A: The IRC Section 402(g) "elective deferral limit" and B. The IRC Section 415(c) "percentage of compensation" limit.

For the 2020 tax year, the contribution limit is a maximum of $19,500 per year.

Note: Contributions to a 403(b) plan are offset by any contributions to a 401(k) plan in the same tax year. Employees contributing to both a 403(b) and 401(k) plan are restricted by IRS regulations to a combined total of $19,500 for the 2020 tax year.

Additional Catch-Up Provisions

Under IRC Code Section 402(g)(7), employees that have at least 15 years of service (full-time equivalent) AND have not maximized the annual contribution limits during this time, may be eligible to contribute an additional $6,500 per tax year for up to five years (or a total of $26,000). To take advantage of this additional catch-up allowance, proof of 15 years of service is required.

The age 50 catch-up is an age based catch-up allowance under IRC section 414(v). This provision allows employees that are or will turn age 50 by the end of the current tax year (December 31) to contribute an additional $6,500.

If an employee qualifies for both of the catch-up provisions, additional contributions will be first applied to the 15 year catch-up allowance and then to the age based catch-up provision.

Distributions

Generally, 403(b) plan assets can be distributed after the participant attains age 59-1/2 to avoid a premature withdrawal penalty.

However, certain conditions will allow withdrawals prior to that age to be made without penalty, which include death, disability, hardship and/or service separation (after age 55).

Distributions for 403(b) plans are also generally taxed at ordinary income tax rates when received, presumably when you are in a lower tax bracket.

Action To Take

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