Tax Sheltered Account  - 403(b) Plans

As an employee of a non-profit organization, you have access to a powerful savings vehicle—the Tax Sheltered Account.  It enables you to save for the future, while reducing your taxes today. The difference between saving in the bank or credit union, and saving in a TSA may mean  thousands of dollars more for you over time.

Sometimes called tax-sheltered accounts, tax-deferred annuities or tax-sheltered custodial accounts, (403(b)s) are offered through your employer and the contributions you make come out of your paycheck before taxes. Because the money is coming out of your paycheck pretax, your taxable income is lower and your tax burden is decreased. Plus, since the money is coming out of your paycheck before you get it, you'll never even see it to miss it!

Consider this hypothetical situation:

With TSA

Without TSA

Gross monthly income

$ 4,000

$ 4,000

Monthly investment savings

400

400

Taxable income

3,600

4,000

Federal withholding  (22%)

792

880

State income tax   (6%)

216

240


Net Pay

$ 2,592

$ 2,480

MAIN FEATURES
Loans, rollovers and employer match may be permitted.  You can begin taking normal distributions from a 403(b) plan at age 59½.  Early withdrawal penalty of 10% generally applies on money withdrawn before age 59½.   Required minimum distributions begin at age 70½ or  retirement which ever one is later.  Flexibility in plan design.  Reduces the employee's current taxable income.  May take to next employer.  Account balance and any earnings grow tax-deferred until withdrawn.

ANNUAL CONTRIBUTIONS
You may contribute (on a pre-tax basis) either 100% of your compensation or $19,000, whichever is less.  Participants age 50 or older may make an additional annual "catch-up" contribution of $6,000.  On top of that, a special rule for 403(b) participants allows certain employees with 15 or more years of service to contribute up to an additional $3,000 per year.

 

457 Plan

A 457 Plan is a retirement plan offered by certain employer groups which allow employees to make contributions on a pretax basis through salary reductions. Since the money is invested pre-tax, your current income tax is reduced. Your money is invested in the investments of your choice and grows on a tax-deferred basis until you begin withdrawals, usually at retirement. 

AVAILABLE TO
Employees of state and local governments, municipalities, and entities that are tax-exempt under federal law.

HOW IT WORKS
Employee's pretax dollars invested in available investment options.

MAIN FEATURES
Generally no loans and no matching employer contributions.  No early withdrawal penalty but must qualify for distribution (attainment of age 70½, separation from  service, unforeseeable emergency).  Nondiscrimination rules do not apply.  Account balance and any earnings grow tax-deferred until withdrawn.

ANNUAL CONTRIBUTIONS
You may contribute (on a pre-tax basis) either 100% of your compensation or $19,000, whichever is less.  Participants age 50 or older can make an additional annual "catch-up" contribution of $6,000, but not in your final three taxable years before you reach the plan’s normal retirement age.  There is a special clause to double contribution limits in your last three years prior to your retirement stipulated by the plan document.  The actual amount may vary based on your employer’s specific plan design.                   


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