403(b) plans help nonprofit employees save for future

Timothy Reese is senior vice president of investments with A.G. Edwards & Sons Inc.

If you work for a nonprofit organization, your employer may have set up a 403(b) plan to help you save for retirement. Some of the qualifying organizations for this type of plan include school systems, charitable institutions, museums and universities. While you may be familiar with a 403(b) plan, there are many features that you may have questions about.

Here are some commonly asked questions about 403(b) plans.

What are the different types of 403(b) plans?

There are two main types of 403(b) arrangements. One type of plan can be funded with employer matching contributions, employee contributions or a combination of both, while the other type of 403(b) plan is funded by employee salary contributions only.

How do I make contributions to the plan?

Once you decide to participate in a plan, you can determine the amount to be deducted from your paycheck, on a pretax basis, and deposited into your 403(b) account. Your contributions are 100 percent vested, meaning you can take those assets with you if you were to leave the employer. However, your employer's contributions may be subject to a vesting schedule, so it is best to check your plan's guidelines.

What is the maximum contribution I can make to a 403(b) plan?

In 2003, the maximum amount you could contribute to a 403(b) plan for the year is $12,000. Beginning in 2004, the contribution limit will increase annually in $1,000 increments until it reaches $15,000 in 2006. Beginning in 2007, the limit will be indexed for inflation in $500 increments.

Also, another benefit to keep in mind is that if you have been with the same employer for more than 15 years, you may be able to increase your standard contribution limit by an additional 53,000 annually.

Are catch-up contributions allowed in the 403(b) plan?

If you participate in a 403(b) plan and are 50 or older, you can make additional annual catch-up contributions, if the plan permits. For 2003, the catch-up contribution limit was $2,000. In addition, this catch-up allowance will increase each year in $1,000 increments until it reaches $5,000 in 2006. Like the contribution limits, beginning in 2007, the catch-up contribution will be indexed for inflation in $500 increments.

What distribution options are available under these type of plans?

Distributions from 403(b) plans may be paid in a lump sum, installments or annuity payments. You are able to take distributions when you reach age 59 1/2 or defer them until age 70.

While primarily for retirement purposes, you may also take distributions from your plan in case of death, disability or if you leave the company.

It is important to remember that if you take distributions before any of these events, you may incur penalties.

Are 403(b) distributions eligible for rollover into an IRA or other qualified plan?

Yes. Distributions from a 403(b) plan are usually eligible for rollover to IRAs, other 403(b) plans or other qualified plans such as a 401(k) or 457(b) plan.

Before planning on rolling over your assets, you should double check whether the plan permits rollovers and consult a financial consultant to see if that is the best alternative for your financial situation.