403(b) & Roth 403(b)

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403bA403(b) Tax-Sheltered Annuity (TSA) is a retirement plan that public schools and certain 501(c)(3) tax-exempt organizations make available to their employees. The 403(b) plan is named after a section in the Internal Revenue Code. It is a tax-advantaged incentive established in 1958 to encourage employees to save more money for retirement and to supplement their pension or Teacher Retirement System account.

Individuals can make contributions to a 403(b) plan on a pre-tax basis by purchasing annuities and mutual funds from approved or qualified vendors. These annuities are funded typically by elective deferrals made under salary reduction agreements and non-elective employer contributions. Contributions and investment earnings in a 403(b) grow tax deferred until withdrawn at which time they are taxed as ordinary income.

Most participants in a tax-sheltered annuity are educators and employees in public schools, churches, colleges and universities.

Below is an example of a teacher in Florida who retires after 25 years of service. In this example, the FRS benefit is based on the average of the last five years of income multiplied by 1.6% (FRS Percentage Pay Factor) = FRS Gross Benefit. Then, a person needs to subtract health insurance, taxes and other expenses to get to the net monthly income.

Determine Your FRS Benefit (An Example)
Below is an example of a 62-year-old teacher who retires after 25 years of service.

To calculate your FRS Benefit
1. Years of service = 25
2. Multiply 25 years of service X 1.6% (state factor)= 40%
3. Multiply final average salary $45,205 x 40% = $18,082 yearly payout
4. Divide $18,082/12 = $1,506 monthly payout
5. Add $1,506 (FRS) + $1,020 est. Social Security* = $2,526 Total Monthly Income

Roughly, a 33% paycut at retirement before taking money out for health insurance, taxes and other expenses. That is why it is so important to save in a 403(b) plan!

Benefits of a 403(b) Plan
A Tax-Sheltered Annuity or 403(b) savings plan enables the employee to contribute pre-tax dollars right from his or her paycheck.
The benefits of a 403(b) plan are similar to those of a 401(k) plan. They include:

•Pre-tax Contributions … A participant makes 403(b) contributions on a pre-tax basis which can greatly reduce his or her tax bill. Generally, if a person contributes $100 a month to a 403(b) plan, he or she has reduced the Federal income taxes by roughly $25 (assuming a 25 percent tax bracket). In effect, a $100 contribution costs only $75. The tax savings are magnified as 403(b) contributions increase.

•Tax-Deferred Growth … Savings in a 403(b) plan can grow tax deferred for decades, resulting in far more wealth for the annuity owner. When contributions and earnings are withdrawn from the 403(b) account, they will be taxed as ordinary income. See IRS Publication 571 for IRS details on the 403(b). You can also obtain this document by calling 1-800-829-3676.

•Supplement A Pension Plan … A 403(b) plan can supplement a pension or a Teachers Retirement System plan. Most pension plans fall far short of providing 100 percent of a person’s final salary

•Access Through Loans …If a plan sponsor allows loans and hardship withdrawals in its plan – policyowners can take loans against their 403(b) plan. These 403(b) loans must be paid back, just like their 401(k) counterparts, or there will be significant tax consequences.

Roth 403(b) Plans
With Roth 403(b) plans, participants can contribute after-tax dollars to save for retirement, without the AGI limitations imposed on Roth IRA accounts. Contributions and earnings for Roth 403(b) accounts are tax-free upon withdrawal as long as the participant has a qualified withdrawal reason and the account has been in existence for 5 years.

These types of plans may benefit employees who would like to access tax-free money in retirement. If you need money prior to the five year holding period, remember contributions made to a Roth can be withdrawn without penalty before retirement, however, the earnings are taxable and subject to penalty.


If you are interested in starting a 403(b) or reviewing your current one, please fill out the form below. We will contract you within 24 hours.

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