European leaders are calling for better retirement plans for Public Sector workers in the UK. Some proposals are suggesting a ‘403b style’ plan, which they have in America. I’m not convinced, but make your own decision here. I have put together an article detailing exactly what they do with them in the USA. My opinion is we are covered, but there are interesting parts of it we could adopt…
While employees working in a private limited company usually turn towards a 401k retirement plan, there’s a valid option available for employees of public schools, churches and hospitals. This comes in the form of a 403 b retirement plan which offers additional support to recipients in terms of a financially stable retirement option. It is tax deferred and is originally developed for employees who work for public schools, universities, colleges etc. The retirement plan is a suitable option for tax exempt non-profit organizations as well like churches, charity houses and a few hospitals. So what is a 403b retirement plan? The plan is originally known as tax sheltered or tax deferred annuity.
What is a 403b Retirement Plan?
Having similar benefits to a 401k plan, the 403b tax deferred annuity is acceptable for recipients who serve offices part of scientific, educational, public testing safety, charitable purposes. There are a lot of benefits you can obtain from this plan. It allows the recipient to place a portion of their salary into an employer sponsored plan that is later converted to retirement funds. The recipient doesn’t pay taxes on contribution or earnings until the money is withdrawn. This generally occurs once the individual has retired or has a lowered tax bracket. The sooner you start the better it is to build fundamentally strong retirement savings.
Benefits of 403b Retirement Plan
1.The contributions made to a 403b retirement plan are deductible when it comes to federal income tax purposes. The money is placed inside the plan without paying for taxes. This tax reduction is very valuable since it reduces income tax that is paid at the recipient’s least tax bracket. In fact you don’t have to pay taxes on the dividends hence can balance the financial custodies related.
2.If the traditional contribution is made, the tax is then paid in distributions during retirement. But considering people retire when their tax bracket is highly reduced, the expenses during retirement are generally lowered.
3.403b retirement plans offer Roth contributions that aren’t eligible for tax deduction. This means that when money is withdrawn from the Roth part of the retirement plan, such withdrawals aren’t taxable. Roth contributions are generally preferred since they offer tax savings on a long term.
4.One of the best benefits of the 403b proposal is that you can take a loan out of the retirement plan. If you’re just about to buy a home or pay mortgage, then this plan is very apt. However the requirements for the loan are crucial and you cannot miss a single payment on the loan. The employer can also offer matching contributions however this can be done on a pre-tax basis.
5.The contribution limits are higher as compared to IRAs which means the more money you save for the retirement the better equipped you will remain. For example as an employee you can place $16,500 into this plan around 2010 and when you turn 50 years or older, recipients can easily make $5,500 catch up contribution in 2010.
403b Retirement Plans – Withdrawal Effects
An important thing to understand about the 403b retirement plan is that there are strict penalties if money is withdrawn early. Since these plans are made to help recipients save for retirement the kind of penalties you face are –
1.10% penalty if the recipient is younger than 59 1/2 years
2.Income taxes are charged on the total withdrawal
3.20% federal income tax withholding
Technically 403b accounts are subjected to collective or universal availability which means that employees should be legitimate to perform salary-suspended contributions. One of the ideal benefits you can gain from using this retirement plan is that it isn’t costly to administer annual reporting necessities in the form 5500 of the IRS. There is also the option to rollover 403b to IRA, but this can be a little more complex than this article can cover.
It is important to seek professional advice from an expert who understands every asset of the 403b retirement plan. You can easily invest in variable, fixed annuities or mutual funds though you should check with your advisor first. An expert in investment plans will help address all your needs. Retirement objectives can easily be accomplished without facing a single loss once you’ve understood the 403b retirement plan.
Since investments always involve market value risks, you should choose a plan that offers a safer return. This is where the 403b retirement plan is beneficial since it allows the recipient to invest in a fair amount of money that later builds into retirement savings. The bottom line is that if you want to save more on your earnings, you should contribute frequently and early. If you are looking to rollover your 403b to ira while still employed, then you should seek professional advice.