403(b): A Retirement Plan for Employees of Schools and Charitable Organizations
What is a 403(b) plan?
A 403(b) plan is a unique way for employees of certain tax-exempt employers and public schools to save for their retirement. The name refers to the section of the Internal Revenue Code under which these plans are governed. Within limits, contributions to a 403(b) plan, whether made by your employer or through an agreement to reduce your own salary, are excluded from your current taxable income. They are taxed only when distributed from the plan. This same tax deferral applies to earnings on those contributions.
At American Century Investments®, we provide a variety of mutual funds for your 403(b), ranging from conservative to aggressive. You can choose the fund or combination of funds that meets your investment objectives. Depending on which American Century Investments' fund you choose, a minimum investment may or may not be required to open your 403(b) account.
Any dividends you receive on your American Century Investments' shares in your 403(b) are reinvested; that is, they are used to purchase additional shares for you. Please see the prospectus for complete details on dividends.
Because American Century Investments offers no-load funds, you do not pay any sales charges, commissions or redemption fees*. Total fees charged on most funds are 1% of total fund assets or less. To learn more about the fees that apply to your fund, please see the fund's prospectus.
* Certain international funds and specialty funds require shares be held a certain amount of time or be subject to a redemption fee. If the shares are sold during the stated hold time, a redemption fee applies. Hold times and redemption fees vary by fund, so please read the prospectus before investing.
Annual 403(b) contributions are limited to the least of the following limits:
- Limit on elective deferrals - $18,000 for 2015*
- Limit on annual additions - $53,000 or 100% of gross compensation, whichever is less, for 2015*
If you will be age 50 or older by the end of the year, you also may be able to make an additional catch-up contribution of $6,000 for 2015. See IRS Publication 571 for complete information on eligibility.
*May be indexed for inflation in future years.
Beginning in 1996, IRS regulations allow you to change the amount of your salary reduction as often as your employer's plan allows. Many people choose to contribute a certain percentage of their salary instead of a fixed dollar amount. This way, contributions automatically change with a salary increase or change in job status.
You may discontinue salary reductions at any time. However, once you stop, you may not be able to resume them until the next calendar year depending on your employer's plan.
A 403(b) is meant for retirement, so you cannot begin removing money from your 403(b) plan unless one of the following "qualifying events" has occurred:
- separation from service
- attain age 59½
- permanent and total disability
- financial hardship
- death of participant
The IRS requires that 20% be withheld from most distributions received from your 403(b) plan. Even if no tax will be due and you plan to roll over the money within 60 days, 20% will be withheld and sent to the IRS. To avoid the 20% withholding from your distribution, you must request that your money be directly rolled over to another 403(b) plan with your new employer or an IRA rollover account.
If you qualify for a distribution and remove money from your 403(b) plan before age 59½, a 10% "premature distribution" penalty tax may apply. Between ages 59½ and 70½, you may remove all or any portion of your 403(b) funds without penalty. After the later of age 70½, or actual retirement, you must begin taking payments from your 403(b).
You can choose one of the following options:
- A lump-sum distribution.
- Direct Rollover to an IRA or another 403(b) plan.
- Installment payments over your life expectancy.
- Installment payments over the joint life expectancies of you and your beneficiaries.
- If you don't want to extend installment payments over your life expectancy, you may choose a shorter, specific period that does not exceed either your life expectancy or the joint life expectancies of you and your beneficiaries. For example, if your life expectancy is 20 years, you may choose to receive payments over the entire 20 years or a shorter period of time, such as 10 years.
You can request your money by check, or if previously authorized, by electronic-funds transfer. You can also have money taken from your 403(b) plan and reinvested into a regular investment account [non-403(b)], instead of receiving a check.
When you establish a 403(b) account at American Century Investments, you can name primary and secondary beneficiaries. The balance of your 403(b) accounts will be paid to your designated beneficiaries when you die.
We recommend that you review your beneficiary designation periodically, especially if there is a change in your family status, such as marriage, divorce, death of a family member, birth or adoption of a child. You may change your beneficiary at any time.
If you do not name beneficiaries, or if all of your beneficiaries die before you, we will pay your 403(b) to your spouse first. If you have no spouse, the money will go to your surviving children. If you have no surviving children, the money is paid to your estate.
If you want to transfer your money to another investment group, it's best to request a direct transfer instead of having the money sent to you to invest somewhere else. If money from your 403(b) plan is paid directly to you, the IRS requires that 20% be withheld from the amount of the distribution. Even if no tax will be due and you roll over the money within the required 60 days, 20% will still be withheld and sent to the IRS. To avoid the 20% withholding, request that your money be directly transferred into another 403(b) plan or rolled over to an IRA.
For more information regarding 403(b) plans at American Century Investments or to request a complete 403(b) enrollment kit by mail, please contact us. If you send an email, please include your complete mailing address and your current employer's name.
Federal contribution limits are listed on this page. Some states and localities may have tax, community property or other laws that are different from the federal laws.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.