403(b) Retirement Planning

About the 403(b) and Why It Is Important–The 403(b) is a retirement plan available to employees of public schools, as well as to  employees of certain tax-exempt organizations. The 403(b) can be an excellent way to save money for retirement

Eligibility–All Olathe Public School employees are eligible to participate in a 403(b).

How a 403(b) is Different From a 401(k)–The 403(b) is a retirement plan available to certain employees of public schools, employees of certain tax-exempt organizations and certain ministers. The 401(k) is a retirement plan for private sector workers.

Section 457(b) Plan–A Section 457(b) Plan is a tax-sheltered retirement plan that is also available to employees of government and non-profit organizations. Typically, employee contributions are made on a pre-tax basis through a salary reduction agreement with the employer. Employees are eligible to contribute 100% of includable compensation to a maximum of $17,500 (for 2013). For employees age 50 or greater, an additional $5,500 may be contributed. Section 457(b) plans do not have an excise tax for premature distribution, but withdrawals are typically not allowed before employment severance. Section 457(b) plans may provide a loan provision at the Plan’s discretion. Distributions from a 457(b) plan must begin no later than age 70 ½ or the year of separation, if later. If employees are considering retiring before age 60 and anticipate an income need, 457(b) plans allow for distribution prior to age 59 ½ and are not subject to a 10-percent federal tax penalty as are distributions from a 403(b) or IRA plan.

How a 403(b) Works–Employees enroll and participate through their employer. Contributions to a 403(b) are made on a pre-tax basis through a Salary Reduction Agreement. This is an arrangement where the participating employee agrees to take a reduction in salary. The amount by which the salary is reduced is directed to investments offered through the employer and selected by the employee. These contributions are called elective deferrals and are excluded from the employee’s taxable income. Contributions grow tax-deferred until the time of retirement, when withdrawals are taxed as ordinary income.

Roth 403(b)–This is a provision that permits employees to irrevocably designate all or a portion of their 403(b) as an after-tax Roth contribution. This type of contribution will not lower the employee’s taxable income. However, distribution of Roth designated funds in retirement will not be subject to taxation.

What You Should Know Before Opening a 403(b)–All investments carry with them a degree of risk. It is important to understand your tolerance for risk before investing. Those with low risk tolerance may be better suited to a conservative investing strategy that relies, for the most part, on fixed investments. Conversely, those with high risk tolerance may be better suited for more aggressive investments. It cannot be emphasized enough that risk tolerance is highly individualized: An investment strategy that is acceptable by one person may not be suited to another.

It is also important to know that fees, operating rules, and investment objectives may vary greatly among product vendors and across investments offered by a particular vendor. Some investments impose surrender charges or restrictions on withdrawals.  One thing is certain: the more you know about yourself as an investor, and the more you know about investing and the workings of the 403(b) plan, the better prepared you will be as an investor.

To view the 403(b) providers available to district employees, please click here.  You will need to work with one of the providers to begin your 403(b) account. To inform payroll of a change in your 403(b) deducations, click on the 2013 403B Election Form.

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Written By: James Payne Date posted: January 4, 2012