403(b) plans offer tax-deferred growth for nonprofit employees

Betty J. Neal is a certified financial planner and investment representative for Edward Jones Investments

If you work for a hospital, school, religious organization or other nonprofit group, then you may be contributing to a 403(b) plan. The 403(b) has always been a great way to build retirement assets and now, it's gotten even better.

A 403(b) sometimes known as a taxsheltered annuity allows investors to defer part of their salary into a pool of investments. Although it is not exactly the same as the better-known 401(k), the 403(b) does share one key benefit: tax-deferred growth of earnings. And if you're saving for retirement, tax deferral is an enormous advantage, because the money will grow much faster than it would if placed in an investment which was taxed yearly. Tax deferral is the biggest asset of a 403(b).

But new tax laws have given the plan some other important new benefits.

Higher employee contribution limits: In 2001, employees could contribute $10,500 to their 403(b) plan. But in 2002, employees can put in up to $11,000. This ceiling will then increase by $1,000 per year until it caps out at $15,000 in 2006. Starting in 2007, the $15,000 base will be indexed for inflation.

Higher total contribution limits: In previous years, the total 403(b) contribution limit which includes both the employee's and employer's contributions was based on a formula that was more restrictive than the current guidelines. Now, the total contribution to the plan is based on 100 percent of the employee's salary, up to $40,000.

"Catch-up" contributions for workers 50 and older: If you're 50 or older and you don't think you've saved enough for retirement, the new tax laws have given you a bonus. You can now put in additional money to the 403(b) above the normal contribution limits. In 2002, employees may kick in an extra $1,000 to the plan. This "catch-up" contribution rises by $1,000 per year until it reaches $5,000 in 2006, after which it is indexed for inflation.

Ability to roll over 403(b) assets into another retirement plan: The new tax laws offer a great deal of flexibility with regard to plan assets. Specifically, employees can "roll over" their 403(b) funds into a new employer's 401(k), 403(b) or 457 plan for government employees, as long as these plans permit such rollovers. And these rollovers are taxfree, as well. Employees can also move their 403(b) into a traditional IRA.

These are just some of the 403(b)-related tax law changes. To find out more about these changes, consult with a tax adviser.