403B and 457Plans: A Report by the Insurance Subcommittee

INTRODUCTION TO RETIREMENT ACCOUNTS

At HFC, we have access to two types of employer-sponsored retirement plans: 403(b) and 457 https://www.smart401k.com/resource-center/retirement-investing-basics/retirement-plan-types

403(b): a tax-deferred retirement plan at tax-exempt organizations (e.g., public schools, colleges, etc.). These are comparable to a 401k for private-sector employees. These are also sometimes referred to as a “tax- sheltered annuity (TSA),” but investments are not limited to annuities.

Here is a video that explains the basics: http://www.investopedia.com/video/play/403b-plan/ https://www.irs.gov/Retirement-Plans/IRC-403(b)-Tax-Sheltered-Annuity-Plans

In 2016, the maximum tax-deferred contribution to a 403(b) is $18,000 ($24,000 if you are 50 or over). This includes the portion contributed by the college ($1650, plus the supplement beginning in your 10th year of employment).  http://www.investopedia.com/university/retirementplans/403b/

457: a tax-deferred compensation plan offered in some states at tax-exempt government organizations (e.g., public schools, colleges, etc.). The contribution limits for 2016 are the same as for 403(b) plans. You can contribute to both plans in the same year, for a total of $36,000 ($48,000 if age 50 or older). The major difference between 403(b) and 457 plans are the distribution rules. In particular, if you are no longer working for that employer, you can take distributions from a 457 plan at any age without penalty. http://www.investopedia.com/terms/1/457plan.asp

https://www.irs.gov/Retirement-Plans/IRC-457b-Deferred-Compensation-Plans

At HFC, you current have the choice of setting up a custodial account with the vendors listed below (current as of March 2016). Contact Sandy Cartwright in Payroll (slcartwright@hfcc.edu, ext. 9866) with questions.

403(b) vendors 457b vendors
VALIC (AIG Retirement) VALIC (AIG Retirement)
Ameriprise Financial Services
AXA Equitable AXA Equitable
Consolidated Financial (Great American) Consolidated Financial (Great American)
Fidelity Fidelity
TIAA-CREF TIAA-CREF
Vanguard
Vanguard products (through Lincoln Investment)* Vanguard products (through Lincoln Investment)*

*note that as of 2014, additional fees were assessed by this vendor to purchase Vanguard products. Members are urged to investigate this carefully and compare costs to a 403b account directly with Vanguard.

You can change vendors and set up a plan-to-plan transfer of funds. The TSA Consulting Group that handles 403b/457 contributions for the college will assist with this (it must be done properly to avoid taxes/penalties). You can also consolidate funds from previous places of employment (if applicable).

403(b) plans and 457 plans can be either traditional (as described above) or Roth-format accounts. See the next page for a comparison of those types.

Other resources:

http://www.fool.com/retirement/401k/401kintro-is-your-retirement-plan-foolish.aspx http://money.cnn.com/retirement/guide/401k_403bplans.moneymag/

Individual retirement arrangements (IRAs)

You can also set up your own IRA. You can do this at many of the same vendors listed above, as well as low-cost vendors (e.g., TD Ameritrade) or full-service firms that actively manage your account. IRAs generally have more flexibility than an employer-sponsored plan (e.g., you can purchase individual stocks, etc.). https://www.irs.gov/Retirement-Plans/Individual-Retirement-Arrangements-(IRAs)-1 https://www.irs.gov/publications/p590a/index.html (IRS publication 590a)

There are two types of IRAs: traditional and Roth. Here are some of the differences:

  • Eligibility: anyone can participate in a traditional IRA. Roth IRAs have income limits: in 2016, the income threshold starts at $117,000 (single) and at $184,000 (married filing jointly). You cannot contribute to a traditional IRA after age 70-1/2, but there is no age limit for a Roth IRA. (see the IRS IRA link above)
  • Tax deductions: contributions to a traditional IRA may be deductible (depending on your modified adjusted gross income, mAGI). Since you are covered by a retirement plan at work, you can deduct your contribution if your mAGI is under $61,000 (single) or $98,000 (married filing jointly). You can contribute if your income exceeds the limit, but you cannot take a tax deduction in that case. Roth contributions are never tax- deductible. (see the IRS IRA link above)
  • Tax on withdrawals: withdrawals from a traditional IRA are taxes at federal and state income tax

Withdrawals from a Roth IRA are tax-free.

  • Penalties: withdrawals from a traditional IRA before age 59-1/2 have a 10% penalty (or more). Withdrawals on contributions from a Roth IRA generally have no penalty; withdrawals of earnings before age 59-1/2 have penalties (with certain exceptions).
  • Required minimum distributions (RMDs): Traditional IRAs require RMDs by age 70-1/2. Roth IRAs do not require this in your

Contributions for IRAs are limited to the total in the table below – so in 2016, you could contribute up to $5,500 to one IRA, or divide it between Roth and traditional IRAs. So unlike 403(b) and 457 accounts, you cannot “double-dip” and contribute the limit to both.

https://www.smart401k.com/resource-center/retirement-investing-basics/individual-retirement-account-(ira) https://www.irs.gov/Retirement-Plans/Traditional-and-Roth-IRAs (nice comparison chart of the two types) More info on traditional IRAs      http://www.investopedia.com/university/retirementplans/ira/

More info on Roth IRAs                 http://www.investopedia.com/university/retirementplans/rothira/

http://www.rothira.com/

Contribution limits – 2016

Type of account Under age 50 Age 50 or older
Traditional and Roth IRA $5,500 $6,500
403(b), 457 $18,000 $24,000

Disclaimer: the information in this document was collected from the various websites listed above for educational and informational purposes only. You should not make any decision related to finances, investments, trading, or otherwise based on any of the information presented here without undertaking independent due diligence and consultation with a professional broker or competent financial advisor.

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