An employer-sponsored retirement plan for public schools and certain tax-exempt organizations.
If you work for a public school or a 501(c)(3) tax-exempt organization, a 403b is a great way to save for retirement.
The 403b plan is an employer-sponsored supplemental retirement savings plan that, similar to a 401k plan, allows employees to contribute on a pre-tax or (if permitted by the 403b plan) Roth after-tax basis. A 403b plan can only be sponsored by a public school or a 501(c)(3) tax-exempt organization. If your employer sponsors a 403b plan, you’ll get valuable benefits for retirement savings.
Tax-deferred investment earnings. The earnings in your investment are compounded (re-invested) and have the potential to grow tax-deferred. These tax-deferred earnings may grow faster than a similar taxed account because taxes are not due until withdrawn.
Ability to reduce your taxable income. You determine the amount of your 403b contributions (up to IRS-defined limits) through a salary reduction agreement with your employer. Your contributions will be pre-tax, reducing your current taxable compensation.
Catch-up contributions. If you are a longer service employee or are at least age 50, you may be able to contribute beyond the general IRS limits.
Ability to have earnings withdrawn tax-free. Your 403b plan may permit you to make Roth contributions, which are made on an after-tax basis. The earnings on Roth 403b accounts may be free from federal income tax if you meet certain IRS criteria when you are eligible for a distribution under the 403b plan.
Employer contributions. Depending on the 403b plan design, your employer may also make a contribution to the 403b plan.
Investment options that you can control. Typically, a 403b plan lets you choose among investment funds, often ranging from very conservative to aggressive growth, offered under the Plan.
Employees can access their accounts when they have a distributable event under the Plan. Amounts typically are subject to income tax when withdrawn from the Plan and you may also be subject to the IRS 10% premature distribution penalty tax unless you meet one of the IRS exemptions. Special rules apply to withdrawals of Roth 403b amounts.
Portability. If you leave your job, you can leave your money in plan, roll your 403b account to into another employer’s eligible retirement plan, or to a traditional IRA or (if rolled directly) a Roth IRA. You also have the option of cashing out.1 The distribution will be subject to income tax and the 10% premature distribution penalty tax unless you meet one of the IRS exemptions.
In 2017, the California Public Employees' Retirement System had one of the better years a giant pension system has ever enjoyed. Its investment fund soared by $47 billion, a nearly 16 percent gain that brought its total to $350 billion.
But as pointed out by Ed Mendel on the invaluable Calpensions.com website, this fantastic result is little more than a blip when looking at CalPERS' grim long-term financial picture. The gain means that CalPERS now has about 71 percent of the projected future assets that it will need to pay for the pensions of its 1.9 million members from state and local agencies. That's better than the 68 percent estimate from before CalPERS' banner investment year, but it's still far less than the minimum 80 percent level recommended by experts.
This underscores the need for pension reform to be an issue in this year's race to replace Gov. Jerry Brown. The minor reforms Brown got approved in 2012 have accomplished little, with pension bills soaring for local agencies and the state alike. In 2009, Ron Seeling — then CalPERS' chief actuary — said at a Sacramento seminar that the state's pension costs were "unsustainable." He was right then and he's right now. The candidates to be California's next governor must explain how they would address a crisis that CalPERS' own numbers man — not a reflexive union-basher — identified long ago.
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