If you work for a nonprofit or 501(c)(3) organization, you have a 403(b) plan. I'm sure of that because nonprofit organizations are obligated to offer employees participation in a 403(b), a retirement savings account that's kind of like a 401(k) plan for nonprofits. So, now that I know you have one, the question is: how much can you put into your 403(b) in 2013?
2013 Contribution Limits for 403(b) Plans
In general, you can contribute as much as $17,500 in 2013, up from $17,000 in 2012. Those age 50 or older may be eligible for a catch-up contribution, which would increase the limit by $5,500. That brings your total potential contribution limit to $23,000 in 2013. The contribution maximums adjust over time in $500 increments to meet cost-of-living inflation.
These limits could increase even further if your employer offers a 403(b) match. Like a 401(k) matching program, a 403(b) match is a benefit where an employer matches a portion of your contribution. For example, for every $1 you put it, the employer may give you an additional $0.50. Of course, the rate at which you get it may follow a vesting schedule, which keeps you from getting the bonus money all at once. Instead, you get a little more for each year you work with that employer.
Roth 403(b) Contribution Limits for 2013
Contributions for Roth 403(b) plans are the same: $17,500 in 2013, plus $5,500 if you are older than 50. A Roth 403(b) works slightly different. Contributions go in after-tax (instead of pre-tax) and are generally never taxed again.
How a 403(b) Plan Works
A 403(b) plan is also known as a TSA or tax-sheltered annuity plan. Throughout the history of these plans, many have invested in annuity contracts. Before the mid 1970s, that's all these plans invested in.
For those who do not know what an annuity contract is, it's an insurance contract with an investing twist. You make contributions to investments within the annuity and there's a guaranteed return or repayment amount in retirement. (This can be a lump-sum repayment or regular distributions.) With some annuities, the interest or return you earn is fixed, with others it is variable. Criticism of annuities tends to center around cost: they tend to more expensive than other types of investments. Plus, in years when the market soars, a fixed rate of return doesn't look as good as it did during that bear market. No matter. These days, most 403(b) plans offer mutual fund investments in custodial accounts instead of or as well as annuity investments. This makes 403(b) plans are a lot more like traditional 401(k) plans.
Like a 401(k), contributions to a 403(b) plan are made through your pre-tax salary. The investments are not taxed until the money is withdrawn at retirement at age 59 1/2 or before 70 1/2. Take the money out earlier than 59 1/2 and you will likely pay a 10% penalty fee, as well as any applicable federal, state and local income taxes. Some employers may offer 403(b) loans, to allow employees access to this cash before retirement. (Before you consider such a loan, read more about how a 401(k) or 403(b) loan works.Roth 403(b) Plans
Some employees may also have access to a Roth 403(b) plan, which is slightly different. With a Roth, you make after-tax contributions, but you do not pay taxes when you withdraw the money at retirement. If you suspect your taxes will be higher at retirement than they are today, a Roth 403(b) may be an attractive option.
So will you contribute to a 403(b) plan in 2013? If you work in a nonprofit, you have access to this plan, you have the opportunity, and you probably have the need. There's no reason to not do it, and it could be one of the best retirement moves you ever make.
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