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Monday, March 7, 2011

Guide to elective deferrals and annual additions for 403(b) plans

403(b) retirement plans
403(b) plans can be rolled over to a Roth IRA

A 403(b) is a type of retirement plan similar to a 401(k) except 403(b) are used for non-profit organizations and some government institutions. The statutory code governing 403(b) retirement plans is contained within Title 26 of the U.S. Code. The Internal Revenue Service (IRS) forms regulations and rulings in accordance with the code to guide employers and employees with the administration and management of these retirement plans.

Elective deferrals


An elective deferral is the part of an employee's income that is withheld for contribution to a 403(b) plan. This amount is considered pre-taxed income and does not become taxable until withdrawal from the 403(b) retirement plan. The affect on the tax payer is a lower taxable income for every year of employment in which an elective deferral is made. The IRS states the maximum limit for 2010 elective deferrals is generally $16,500.

Annual additions


According to the Internal Revenue Service, contributions to a 403(b) can also be made after tax and by employer contributions such as matching programs. These annual additions are termed non-elective and after-tax contributions. Both elective deferrals and other annual additions to a 403(b) retirement plan are subject to what is called the Maximum Amount Contributable (MAC)

Maximum contributions


In 2010, the maximum 403(b) contribution amount is $49,000. This amount includes all types of contributions including employer determined elective deferral limits and any additional 403(b) accounts an employee may have. Long time service employees may be granted higher additions i.e. 15 years plus, and catch up contributions may be allowable for persons over 50 years of age.

Roth 403(b) plans


Another kind of 403(b) is the Roth 403(b). Since Roth accounts are contributed to using after tax dollars accounts, the money in these accounts should be managed separately per the IRS. The maximum contribution to a Roth 403(b) may be higher than a Roth IRA as the IRS states the allowable contribution amount is the total elective deferral amount allowed minus any non-Roth elective deferrals. This means if no regular 403(b) elective deferral contributions are made, then the total amount could be as high as $16,500 if not higher.

Return on 403(b) deferrals and additions


403(b) accounts can grow in varied ways due to different investment plans. A choice of risk levels may also be chosen via the financial products offered through the 403(b). For example, the U.S. Securities and Exchange Commission (SEC) claims four types of investment plans exist for 403(b) accounts. These include fixed rates of interest, investment linked annuities, mutual fund 403(b) plans,  and minimum return stock index based retirement plans.

Sources: 

1. http://bit.ly/bcUt9J (Cornell University Law School)
2. http://bit.ly/8Y4v1x (IRS: Publication 571)
3. http://bit.ly/cPYWT9 (IRS: MAC)
4. http://bit.ly/dfTKm6 (Securities and Exchange Commission) 

Image license: Ken Teegardin, CC BY-SA 2.0