Current Pension Topics

403(b) Restrictions, Benefits 

By JOEL L. FRANK

Q.: I have been with the same company for 20 years. We had a 403(b) when we were non-profit. We now have a 401(k) since we are for-profit. My company said that I may not roll the 403(b) into anything unless I leave the company. Is this true?

A.S.

A.: Yes it is, unless you satisfy a qualifying event. The events are: Separation from employment, disability, attainment of age 59-1/2 or death. If you do not like, however, your investment menu (high costs/poor performance) you may effectuate, under Revenue Ruling 90-24, a "direct transfer" to another 403(b) investment provider. These qualifying events do not apply to a Revenue Ruling 90-24 Direct Transfer. If you go this route, stick to no-load mutual funds. Do not buy a variable annuity unless it is issued by the no-load TIAA-CREF organization.

Q.: I heard from a friend that some Teachers utilize 457 plans to make excess contributions upon maxing out their 403(b)s ... I'm having trouble discerning what this means. My impression is that the limits are $15,000 or $20,000 with the catch-up, regardless of whether it's into just a 403(b), split between a 403(b) and 457 etc. Is there a rule which allows additional contributions into a 457? Also, who exactly contributes to 457s? I didn't think Teachers were eligible for them.

R.B.

A.: All state and local governmental employees are eligible for 457(b) and have been for almost 30 years, ever since Section 457(b) was added to the tax code. Public school employees are also eligible for a 403(b). Prior to 2002, the maximum contribution allowed to a 403(b) was greater than to a 457(b). Additionally, the two amounts were aggregated at the 403(b) maximum. Example: If the 403(b) maximum was $9,500 and the 457(b) maximum was $7,500 and the employee contributed $7,500 to the 457(b), the participant could not contribute more than $2,000 to the 403(b). If the participant contributed $9,500 to the 403(b), no contributions were allowed to the 457(b). So there was no compulsion for a public school district to offer both types of arrangements. This all changed in 2002 when new rules went into effect. Now the maximum contribution amounts are the same for both plans and the aggregation rule has been eliminated. For 2006, the per-plan maximum is $15,000 ($20,000 if 50+). One who is contributing the maximum to both plans for 2006 is contributing a total of either $30,000 or $40,000. Today the term "excess contributions" probably means that if one contributes more than the per-plan maximum of $15,000 ($20,000 if 50+) and contributes the maximum to one plan, the amount in excess of the maximum goes to the other plan.

Please note that if you are past 59-1/2 (gainfully employed or not), you are entitled to make penalty-free withdrawals from your IRA or other tax-deferred retirement plans. The withdrawal is taxed at the Federal level at ordinary rates. Residents of the State and City of New York do not pay state and city income tax on the first $20,000 withdrawn from such accounts. Special treatment for participants of the 403(b) Program of the Teachers' Retirement System of the City of New York: The entire withdrawal is not subject to New York State and City income tax, not just the first $20,000.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.