Choosing a Retirement Plan 403(b) for State Workers, Teachers

Many retirees coming from the North who were teachers, administrators for learning institutions may want to learn more about this plan prior to relocation or retirement.


403(b) Tax-Sheltered Annuity plans are relatively unknown. That’s because only certain employers are allowed to have them. If you are:

  • a public school, college, or university,
  • a church; or
  • a charitable entity tax-exempt under section 501(c)(3) of the Code

then read on. You are allowed to have a 403(b) plan.

Basically, 403(b) plans are similar to 401(k) plans that are maintained by “for-profit” entities. Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary. In this case, their deferred money goes to a 403(b) plan sponsored by their employer (that would be you). This deferred money generally does not get taxed by the federal government or by most state governments until distributed. This is just as it is with 401(k) plans. If you establish a 403(b) plan, you can have other retirement plans and you may need to file Form 5500.

Information List:

Pros and Cons:

  • Flexibility in contributions.
  • Only salary deferral plan available to public school employees.
  • Investment options are fewer than under a 401(k) plan.

Who Contributes:  Employee salary deferrals and Employer contributions.

Contribution Limits:
Employee – Lesser of (a) $16,500 in 2010 and 2011 (subject to cost-of-living adjustments in later years), or (b) 100% of includable compensation. If the employee is age 50 or over, a “catch-up” contribution is also allowed. This additional catch-up contribution amount is $5,500 for 2010 and 2011 (subject to cost-of-living adjustments in later years).

Employer/Employee – The lesser of $49,000 in 2010 and 2011 (subject to cost-of-living adjustments in later years) or 100% of includable compensation.  Note: The employee is still limited to the employee elective deferral limit ($16,500 for 2010 and 2011); the employer can add up to another $32,500 (for a total of $49,000 in 2010 and 2011).

Filing Requirements:  Annual filing of Form 5500 may be required.

Participant Loans:  Permitted.

In-Service Withdrawals:  Yes, but subject to possible 10% penalty if under age 59-1/2.

 – Establish a 403(b) Plan

Only public educational institutions or 501(c)(3) tax-exempt organizations may establish a 403(b) plan.

The general steps to establish a 403(b) plan are:

1.      An annuity contract, which is a contract provided through an insurance company;

2.      A custodial account, which is an account invested in mutual funds; or

3.      A retirement income account set up for church employees that can be invested in either annuities or mutual funds.

403(b) plans cannot be funded with life insurance (issued after September 24, 2007), endowment, health, accident or other types of insurance contracts.

The employer, who is responsible for ensuring its plan complies with all legal requirements, should verify that there is no conflict between the terms of the 403(b) plan and the provisions of any annuity contract or custodial account agreement under the plan. The plan’s terms will overrule any inconsistencies.

Why Participate in the 403(b) Plan?

Many retirement experts suggest that a retirement income level of at least 70% of your final salary is a good target for people starting to save for retirement. Many people who retire at age 65 could live 20 or more years in retirement. Proper planning for those years is essential to ensuring that you have the income you need. Depending on your personal goals, SURS alone may not meet your retirement objectives.

Traditional (Pre-Tax) vs. Roth (Post-Tax)

Please visit the Traditional (pre-tax) and Roth (post-tax) pages for further information on each option. You may choose to contribute on a pre-tax basis to the traditional 403(b), on a post-tax basis to the Roth 403(b), or a combination of the two. You may wish to consult with a tax or financial advisor to determine the best option for your individual situation.


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