Our teachers work hard to educate our students. Now their retirement programs can work harder, too.
If you work for our local schools or another nonprofit group, then you may be contributing to a 403(b) plan. Your 403(b) has always been a great way to build retirement assets, and now, it's gotten even better.
As you know, your 403(b) -- sometimes known as a tax-sheltered annuity -- allows you to defer part of your salary into a pool of investments. Although it is not exactly the same as the better-known 401(k), your 403(b) does share one key benefit: Tax-deferred growth of earnings. And if you're saving for retirement, tax deferral is an enormous advantage, because your money will grow much faster than it would if placed in an investment on which you paid taxes every year. In fact, tax deferral is the biggest asset of your 403(b).
But new tax laws have given your plan some other important new benefits.
- Higher employee contribution limits. Contribution limits are increasing. Last year, you could contribute up to $12,000 to your 403(b) plan. In 2004, you could contribute up to $13,000. This ceiling would then increase by $1,000 per year, until it capped out at $15,000 in 2006. Starting in 2007, the $15,000 base will be indexed for inflation.
- Higher total contribution limits. In previous years, the total 403(b) contribution limit, which includes your contribution and that of your employer, was based on a formula that was more restrictive than the current guidelines. Now, the total contribution to your plan is based on 100 percent of your salary, up to $40,000.
- ‘Catch-up' contributions for workers 50 and older. If you're 50 or over, and you don't think you've saved enough for retirement, the new tax laws have given you a bonus. You can now put in additional money to your 403(b), above and beyond the normal contribution limits. In 2004, you can kick in an extra $3,000 to your plan; this "catch-up" contribution rises by $1,000 per year until it reaches $5,000 in 2006, after which it is indexed for inflation.
- Ability to roll over 403(b) assets into another retirement plan. In your life, as in everyone's, circumstances may change, and you may someday decide to take another job. If you do, what happens to your 403(b)? Thanks to the new tax laws, you now have a great deal of flexibility with regard to your
plan assets. Specifically, you can "roll over" your 403(b) funds into a new employer's 401(k), 403(b) or 457 plan for government employees, as long as these plans permit such rollovers. And these rollovers are tax-free, as well. You can also move your 403(b) into a traditional IRA.
We've just looked at some of the 403(b)-related tax law changes. There are others, as well.
To find out more about how these changes could affect your individual situation, consult with your tax adviser. In any case, continue to contribute as much as you can afford to your 403(b) plan. To enjoy the retirement lifestyle you've envisioned, you'll need to maximize all your financial resources.
Ross Hage is a licensed financial adviser with the firm of Edward Jones. For more information, call (928) 468-2281.