Taxation Of 403b Plans
| 403b is a retirement plan meant for individuals in a certain profession. If you are employed as a doctor, teacher, researcher, librarian, school administrator, nurse, professor, school personnel or minister, you are eligible to have a 403b retirement plan. In addition, even people employed in tax-free organizations can opt for 403b retirement plan. |
People who have 403b retirement plans should be aware that they cannot invest in individual stocks through their plan. Instead they have the following choices open to them:
- Annuity or variable annuity contracts with insurance companies
- Custodial account for mutual funds. This is known as 403b(7)
- Retirement income accounts for churches
If you have a 403b plan, you can set aside pre-tax money through salary deduction after coming to an agreement with your employer. This deducted amount is then transferred to a financial institution chosen by the employer and the money grows tax-deferred until retirement. On withdrawal of the money at retirement, it is taxed like ordinary income. In addition, there are penalties in place for early withdrawal. If you withdraw money before you reach the age of 59 1/2 years, you will have to pay 10 percent early withdrawal penalty along with federal income tax on the amount.
For 2008, the elective contribution limit is $15,500, which is unchanged from 2007. It is quite possible that your employer might make a matching contribution to the plan depending on what the employer’s policy is. If you are older than 50 years, you can made an additional contribution of $5,000 as part of the catch up plan bring the entire elective contribution to $16,000.
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