Cents and Sensibility

Guy Steele

Saturday, July 19, 2003

Changes make
your 403(b) plan
a better deal than ever

Do you work at a school, nonprofit hospital, religious organization or other nonprofit group? If so, you may be participating in a 403(b) retirement plan. You've always gotten a lot of key benefits from your 403(b) -- and now it offers even more.

Before we talk about some of the new laws that have made 403(b) plans more attractive, let's quickly review the chief attributes of this type of account.

>> Tax-deferred earnings. Your 403(b) earnings grow on a tax-deferred basis, so your money will accumulate faster than it would if it were placed in an investment on which you paid taxes every year.

>> Pre-tax contributions. Because you contribute pre-tax dollars to your 403(b), you'll lower your adjusted gross income.

>> Automatic payroll deductions. With all the expenses of daily living, it's hard for many of us to save for retirement. But your employer deducts money for your 403(b) from your paycheck, so you never miss a chance to help build up your savings.

>> Tax-free transfers. Participants in a 403(b) may transfer to another 403(b) at any time, tax-free, without a triggering event -- such as one's employment termination, retirement or death -- that can initiate a distribution from a qualified plan.

All of that has been true, but thanks to some new laws, 403(b) plans are even more user-friendly.

Among these changes, perhaps the most noticeable is the higher contribution limits. In 2003, you can put up to $12,000 in your 403(b). The $12,000 ceiling will increase by $1,000 per year until 2006. Furthermore, if you're 50 or older, you can exceed the contribution limit by $2,000 in 2003; this "catch-up" amount will also increase by $1,000 per year until 2006.

Depending on where you work, you may be able to save much more. Many state and local governments offer 457(b) plans -- another tax-advantaged retirement account -- to government employees, including some who are also eligible for 403(b) plans. In the past, if you participated in a 403(b), you could not make the maximum contribution to a 457(b). But now, thanks to the new tax laws, you may be able to contribute the maximum to both plans -- which would mean a huge boost to your retirement savings.

The new laws also permit greater "portability" of your 403(b). Now, when you leave your job, you can roll over the funds in your 403(b) into an IRA, or into any type of qualified retirement plan, such as a 401(k). (However, some employer-sponsored retirement plans may not accept these rollovers.) You can also move money the other way, by directing 401(k) or IRA distributions into your 403(b).

The advantages of 403(b) portability are clear. If you change jobs, you'll be able to immediately place a large amount of money in your new employer's plan, allowing you to maximize the potential tax-deferred earnings growth. Plus, by consolidating your savings into one plan, you can cut down on paperwork -- and possibly the expenses associated with maintaining individual plans.

There's never been a better time to contribute to your 403(b) plan. It's always been a great way to build resources for retirement -- and now, with higher contribution limits and increased portability, it's more valuable than ever.

See the Columnists section for some past articles.

Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at:


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