403(b) Retirement Plans

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) made several changes to the rules for 403(b) retirement plans.

First, the EGTRRA made the maximum amount contributable (MAC) calculation much simpler by removing the maximum exclusion allowance (MEA) calculation. Now, the contribution rules are as follows:

• An elective deferral limit of $15,000 in 2006; or
• As much as 100% of compensation, as long as that amount is less than the elective deferral limit; or
• Employer-sponsored contribution limits of the lesser of $44,000 (in 2006: $15,000 from the employee and $29,000 from the employer) or 100% of compensation.
• Those above age 50 may contribute an extra $5,000 in 2006.

Secondly, 403(b) plans are now eligible for rollover into 401(k) plans as long as the following apply:

• The individual must be a 401(k) participant.
• Rollovers must be allowed in the 401(k) plan's rules.
• Distributions from a 403(b) plan must be qualifiable, such as death, disability, employment severance, or reaching age 59½.

There are good personal reasons to contribute to a 403(b) plan. Although employees of some qualifying organizations (religious, charitable, scientific, public-safety testing, literary, or educational organizations) may be entitled to pensions, pension proceeds usually do not equal pre-retirement income; contributions to a 403(b) plan can supplement one's pension. Moreover, 403(b) contributions are made with pre-tax dollars, and earnings accumulate without taxation until withdrawal. (Withdrawals made before the age of 59½ may be subject to a 10% federal income tax penalty.)

The changes effected by the EGTRRA make 403(b) participation more desirable than ever. If you work for a qualifying organization, ask about the plan today.