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403(b) Plans Demystified

Colleen Mulder-Seward, MBA
Retirement Calculator, Inc.
403(b) Plans Demystified

For those who have at least 15 years of service in a company with a 403(b) plan, and are planning for retirement, the amount of information available about your 403(b) plan can be dizzying. This article gives you the key items you need to know in a nutshell.

The current limits on 403(b) elective deferrals

Elective deferral limits

The amount you can contribute to your 403(b) plan account each year is determined by the IRS. 

15-year rule

If you have at least 15 years of service with the employer maintaining your 403(b) account, the limit on elective deferrals to your 403(b) account is increased.

Catch-up contributions

You qualify to make additional catch-up contributions if you will have reached age 50 by the end of the year, and the maximum amount of elective deferrals that can be made to your 403(b) account have been made for the plan year.

The table below shows the contribution limits imposed by the IRS.

Year

Elective Deferrals Limit

"15-Year Rule" Limit

Maximum Amount Contributable (MAC) Limit

"Catch-up" Contributions Limit

Total Limit for those 50+ with 15+ years

2005

$14,000

$3,000*

$17,000

$4,000**

$21,000

2006

$15,000

$4,000

$18,000

$5,000

$24,000

*The limit on elective deferrals is increased by the least of (1) $3,000, (2) $15,000, reduced by increases to the general limit you were allowed in earlier years because of this rule, or (3) $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

**The maximum amount of catch-up contributions is the lesser of $4,000 for 2005 or your includible compensation minus your other elective deferrals for the year.

Minimum required distributions (MRD)

The Internal Revenue Code established these minimums to ensure that you actually use your Employer Sponsored Retirement Plan account balance for its intended purpose - retirement.

Unless an earlier date is specified by your plan, you must take your first withdrawal (MRD) according to the following table:

Age

Year of Interest Accrual

First MRD Date

Subsequent Years MRD

Penalty for not following MRD

70 ½

Post- 1986

By April 1 of the calendar year following the year in which you become age 70 ½ or the calendar year in which you retire

Must be made on or before December 31

50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.

70 ½

Pre-1987

Check with your employer, plan administrator, or provider to find out whether the post-1986 rule also applies to pre-1987 accruals.  If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach 75 or April 1 of the calendar year following retirement, whichever is later.

Must be made on or before December 31

50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.

The IRS issued final regulations relating to MRDs from retirement accounts (including 401(k) plan accounts, IRAs, and 403(b) plans) on April 17, 2002, with an effective date of January 1, 2003. The new rules resulted in new life expectancy tables with longer expectancy factors, which generally result in smaller required distribution amounts.

In General, your MRD is determined by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year, by an applicable life expectancy factor taken from the Uniform Lifetime Table.

Uniform Lifetime

For Use by:

  • Unmarried Owners,
  • Married Owners Whose Spouses Are Not More Than 10 Years Younger, and
  • Married Owners Whose Spouses Are Not the Sole Beneficiaries of their plan

 

Age

Distribution Period

Age

Distribution Period

70

27.4

93

9.6

71

26.5

94

9.1

72

25.6

95

8.6

73

24.7

96

8.1

74

23.8

97

7.6

75

22.9

98

7.1

76

22.0

99

6.7

77

21.2

100

6.3

78

20.3

101

5.9

79

19.5

102

5.5

80

18.7

103

5.2

81

17.9

104

4.9

82

17.1

105

4.5

83

16.3

106

4.2

84

15.5

107

3.9

85

14.8

108

3.7

86

14.1

109

3.4

87

13.4

110

3.1

88

12.7

111

2.9

89

12.0

112

2.6

90

11.4

113

2.4

91

10.8

114

2.1

92

10.2

115 and over

1.9

Note: If the sole beneficiary for the entire year is your spouse, whom is more than 10 years younger, then the Joint Life and Last Survivor Expectancy Table should be used, which could reduce the MRD even further. See IRS Publication 590 - Appendix C for more details.

Source: IRS Publication 590 - Appendix C

Example:

Mary is a retired 403(b) participant who turned 70-1/2 on March 31. On December 31 of last year, the ending balance in her 403(b) was $100,000. To calculate her MRD for this year, divide $100,000 by her life expectancy factor of 26.5 years. Her distribution amount is $3773.59.

Account balance

Life expectancy factor = MRD

Thus,

$100,000
26.5

= $3773.59

If your plan's withdrawal provisions allow, you may elect to take more than your MRD from your retirement plan in a given year. This overage can not be applied toward your MRD for the subsequent year. MRDs are subject to federal income tax and may also be subject to state and local taxes. MRDs distributions can not be rolled over into an IRA or employer-sponsored retirement plan.

Distributions received before age 59 1/2 are subject to an additional early distribution penalty tax of 10%, unless an exception applies. Consult a tax professional before accessing money in your 403(b) plan.  Read Publication 571, Tax-Sheltered Annuity Plans (403(b)) Plans, for more information.

How do I keep up-to-date on the latest news impacting my retirement?

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