403b??? Help!

[jenninca]

I've been hit in the head with 403b things several times this week. My school district offers taking pre-tax money to contribute to a 403b plan. In the past three days, I've gotten my "annual benefits plan" in the mail (87 pages of not-so-light reading) and I've gotten three phone calls from 403b people wanting to come out to sign me up for a plan...when is the best time for you today?

Before I even think about signing up for it, I would like to know what on earth is 403b??? Advantages? Disadvantages? How does it work? I'd much rather hear it from people I "know" rather than a salesperson hell-bent on getting a commission from me. I'd never even heard of this until a few days ago. Help!!!

Cindy

[mrisch[$]]

It's like a 401(k) for public employees. Basically, they take money out before you are taxed on it, and often match that amount as well, and put it into a tax deferred plan. You invest until you are 59 or so, and then you can take the money out, and pay taxes only on what you withdraw.

If you can afford the savings, this is about as good a savings plan as you can get:
1. No tax now
2. No tax as it accumulates
3. More than the $2,000 IRA limit
4. Matching contributions

[theworm[$]]

Hi Cindy,
I'm not an expert on this, but a 403B is pretty much the same as a 401K plan. It's a retirement savings plan that schools and academic institutions use. Basically, you can have money deducted from your pay and invested in accounts that you choose. The money is deducted before tax, which is a really good thing. Often, the school system will match a portion of what you invest - for example - they will put in $ for $ up to a certain percent or specified dollar amount.
Generally you will be able to choose from a pretty wide variety of investment options (ie: various mutual funds with different risk and growth potential).
With the stock market in such bad shape, I would think many people would be afraid to invest, but if it were me, I would join the 403B plan (provided I wasn't close to retirement age). The market is low, which means that you'll be buying at low prices. It should ( I really hope) bottom out soon, and then the money should begin grow.
If you decide to join, look at all your investment options. Some options will be safer than others. You should be able to move money between accounts as the market changes. Find out whether your school district will match funds, and how much they match, and, most importantly, get advise from someone who knows a lot more than I!

[jenninca]

Thanks for the advice. I came up with more questions. I realize that some of these can probably only be answered by the district, but please help with what you can!

1. How does 401k work? (Can you tell I've never worked anywhere with a retirement plan before?)

2. What happens to the money if I move to another district or state? I lost two years' worth of contributions the school made at another school because I wasn't there long enough to get "vested." Can you move this money around with you?

3. Can I pick my own investment person, or do I have to choose these telemarketers who are calling me? (I don't like them!) Would it be beneficial for me to find a financial advisor anyway?

4. Everything in the district paperwork calls this a "tax-deferred annuity." Is this what all 403bs are, or does this mean we're limited to a certain type?

Thank you, thank you, thank you for any help you can give. I'm 26, so have a long way to go to retirement, and feel pretty much like a fool when it comes to investing.

Cindy

[theworm[$]]

Don't know all the answers, but I'll try:

1) 401ks or 403bs are ways to save for retirement. You determine what amount $ or % (up to a certain allowable limit) that you want deducted from your pay. This money is deducted BEFORE tax is taken from your paycheck. This is a big savings. For example - say you make $250 in your pay check and your taxes are 20% (I'm making up easy numbers). You would pay $50 in taxes and take home $200. Now lets say you elect to have 10% of your pay deduced into your 403B. $25 would be taken out of your pay and invested in your 403B account. Your taxable pay would then only by $225 (not $250). 20% tax would be $45. Your take home pay would then be $180. You are saving $25 towards retirement, but your take home pay was only reduced by $20. That's what makes these plans so attractive. In addition, the school district may match some of your contributions - that means they are GIVING you additional funds into your account.

2) If you move, quit, etc - all of the money that you contributed is still yours. You can usually leave it in the same account or you can roll-it-over into an IRA account with a company of your choice. Vesting refers to how much money you get to keep out of the funds that your employer contributed. Usually you get a portion every year and are 100% vested after 5 years - it varies by state and employer. You do not need to be vested on your own funds - the only way that you can lose those funds are through flucuation in the stock market (mutual funds, etc).

3) I don't know your plan, but you should never have to deal with telemarketers for your investments. Your employer should be able to give you a customer service number to call for help and investment advice.

4) I can't really answer this one completely. Everything that you invest in your 403b is tax deferred. Since the money is taken out of your pay before taxes, you pay no tax on it now. As the money grows, you do not pay income tax on the growth. You only pay income tax on this money when your start to withdraw it. Generally, when people begin to withdraw the money, they are retired, and, therefore, in a lower tax bracket. That means that down the road when they pay tax on the money you will pay less taxes on it. I believe that they are calling this an annuity because you continue to deposit money into the account, but you should be able to select several investment options including mutual funds, bond funds, etc.

Ask at work for someone that you can call to give you better answers to these questions!

Good luck!

[mjfrombuffalo[$]]

It ain't just for schools, it's for any nonprofit entity - like charities, including The Sal (my employer).

Like they said above, a 403b is the non-profit world's version of a 401k. However, I have yet to hear of an organization that uses 403b's and also contributes matching funds. Since me and hubby both work for public/charitable entities (he's a teacher), we're out of that wonderful benefit provided by our corporate, capitalist friends' employers.


1. How does 401k work? (Can you tell I've never worked anywhere with a retirement plan before?) - A 401k/403b isn't really a retirement plan like a pension plan, it's an opportunity granted to the employee to save for his/her own retirement. Generally, when you're in a 403b money is taken out of your paycheck on a PRE-TAX basis and placed into this account, run by some investment firm. In my case, $125 every paycheck gets deducted and goes to Mutual of America. You have the opportunity when you sign up to allocate your funds. Say you decide to have $100 taken out of every check. You can have 25% go into a stock fund, 25% go into a bond fund, 25% go into an index fund, and 25% go into international investments. READ THE INFO from the investment firm. They will offer you several places to which you can allocate your funds. Depending on your age and your ability to tolerate risk, you'll want to allocate your money accordingly. Generally people your age can be riskier since you have longer to go until retirement. Once your account is set up, you should have the opportunity to change your allocations (sometimes on line) in the future, as the markets change and your age and circumstances change also.


2. What happens to the money if I move to another district or state? I lost two years' worth of contributions the school made at another school because I wasn't there long enough to get "vested." Can you move this money around with you? You can leave the money in the funds you've chosen, move the money around, etc., or you can roll it over into an IRA or other retirement investment vehicle. You probably won't be able to continue to contribute to it. You definitely can't "cash it in" - you'll get hit with a huge tax on the money. It is your money; you can lose it if the market takes a dive (it's an investment, not an FDIC insured bank account). Any of the interest you get is yours. Your employer can't touch it. If the fund is doing well and you leave your job, you can leave it there. If you want all your money in one place, you may be able to roll it over into another fund if your new employer also offers 403b/401k plans.


3. Can I pick my own investment person, or do I have to choose these telemarketers who are calling me? (I don't like them!) Would it be beneficial for me to find a financial advisor anyway? You'll be your own investment person for the most part. They'll give you lots of resources (prospectuses, etc,) to read and it's up to you to decide how much money you'll invest and in which funds you'll invest it. However, it is ALWAYS good to meet with a financial advisor. If you're a teacher, you probably have an Educators Credit Union in your area which you are eligible to join. My husband's credit union has free financial advisement services there - good since 1) it's free and 2) you know it's unbiased as they don't make commission from XYZ company for recommending XYZ investments.


4. Everything in the district paperwork calls this a "tax-deferred annuity." Is this what all 403bs are, or does this mean we're limited to a certain type? That's just another name for 403b.


I'm only (?!) 34 and I've had the 403b for about 5 years now. I did it because 1) social security ain't gonna cut it when I retire; 2) my employer's pension plan ain't gonna cut it when I retire; and 3) when I got married, we got socked with taxes big-time (dual income, no kids, no mortgage, no deductions). If a person makes $50,000 a year and puts $5,000 into a 403b, Uncle Sam only counts the person's income as $45,000 when figuring out the income tax. It's a nice way to shelter money, save for retirement, invest without paying brokers fees, etc. and in most instances you can borrow against it for medical emergencies, continuing education, and first-time mortgages. (Borrowing is NOT recommended, however, since you have to pay the money back into the fund in X amount of time or pay taxes on what you took out.) And if you start with a modest amount now, you'll be very thankful in 40 years when you retire.

Hope this helps!

mj

[jenninca]

Definitely helps! Thanks much guys!

Cindy

[Prepoia[$]]

Wow! They have really given you the low down and good advice too

I did want to mention that being "vested" varies from state to state for teachers. My niece is a teacher in Ohio and is vested in 5 years; I'm in Michigan and it takes 10 years. Vested only has to do with the retirement money contributed into the state retirement fund from your district. This money stays once you're vested and even if you change districts within the state. But since most education is a state affair, you lose anything your district contributed if you aren't vested when you move to another state. If you are vested when you move to another state, the state holding the money holds it until you apply for retirement.

This vested stuff has nothing to do with the 403 or annuity plans. In michigan I take out 20% and invest it in mutual funds through automatic payroll deduction. You can't take out more than 20% (but as little as 1% is okay) or $12,000 whichever is most in Michigan. (I think this might be a federal tax requirement).

Just one word of caution....if you ever find you have to take out this money before you retire, there is a whopping tax penalty. You can get the money but you have to pay all the taxes on the money AND pay another penalty to the government on top of that.

This is the only type of retirement plans over and above the retirement plan the state provides for teachers that can be deducted automatically and before taxes from your payroll.

Our school only has certain companies they deal with and we have to choose from one of those companies. But, if you know the funds they deal with (like Putnam or Fidelity or whatever) I think you can actually work through your district payroll person to have it deducted and can by-pass salesmen. That's only true if it's what they call a no load fund that allows anyone to join the fund without a broker. Otherwise, choose the fund first and don't worry about the salesperson because you only deal with them for the initial sign up and then if you want to make it a higher percentage later on, you'll do that through your payroll person.

There are other retirement plans that you can have but they are not related to school and there is no automatic deduction available for them. The nicest of these is the Roth IRA. The Roth works opposite from the 403. You put in money that has already been taxed but don't pay when you take it out. The nice thing about this is that if you've invested $100,000 over 30 years and when you take it out it's worth $200,000 you don't have to pay taxes on the gained income worth. They treat it as though you've already paid taxes on $200,000. But, that's just another plan available. Also, I think it allows for early withdrawal without penalty because you've already paid taxes on the money. Check with someone about that. I don't want to confuse you with the Roth because you must take advantage of what your employer offers.....but this is a great one to start as an additional one when you're financially able to do it. My son is 29 and has both kinds.

It's wise to start early, even if the amount isn't much. There's all kinds of statistics showing how the money keeps doubling itself over spans of 7 or 10 years, I forget which, but to double 100 to 200 isnt big but later on over time to double 10o,ooo to 200,000 is big time


Sandy

[jenninca]

Sandy, thanks for the advice. In looking through the lovely booklet I found a web address that's supposed to list preferred or acceptable investments or companies or something. I think that's my next stop.

And thanks to my dad (Mr. Accountant), I've got IRAs and Roth IRAs down. I even converted one last year! I was quite impressed with myself. I just had never even heard of 403bs.

Off to research!

Cindy

[quasar]

One minor correction, assuming a 403b works the same as a 401(k).

Folks have told you if you leave the district you can leave the money in place if you want. That's not entirely true. If you have less than a set amount (it changes slightly each year and is currently $5000) then you may be asked by the employer to remove your money. In that case, you either have to roll it over to another retirement plan or move it into an IRA or take the tax hit. If you have less than the set amount and the employer doesn't ask you to remove the money you may keep it there. Note that they can ask at any time - I had an employer make me take funds out over two years after I stopped working there (I had left them because I liked their funds better than the new ones at my new company).

Janice

[Prepoia[$]]

Good advice. My son had to take his out when he quit his last job. But, with a 403 as long as she stays in the state to teach and just changes districts, I'm 99% sure she can leave it in. The state holds and controls all retirement monies and they don't really care as long as you continue as a "teacher" for the state and are paying in from somewhere in the state.

And Cindy, good for your dad! I wish our daughter would think about those kinds of things.