In the video "403(b) Explained: Rules, Limits, and Roth Option," important information about 403(b) plans is discussed. The video explains that withdrawals from 403(b) accounts are taxed as regular income at the federal level, with potential state tax exemptions. It also highlights withdrawal restrictions and early withdrawal penalties.
Additionally, the video covers key details about 403(b) plan withdrawal rules, contribution limits for 2019, catch-up contributions for employees aged 50 or over, and the choice between traditional and Roth 403(b) plans based on tax brackets.
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Voiceover
Welcome to part two of our 403(b) insight videos! In this video we will be addressing the 403(b) withdrawal rules, 403(b) contribution limits and what a Roth 403(b) consists of.
Withdrawals from your 403(b) account will be taxed as regular income at the federal level. Some states treat it as regular income, while in some states all or part of it is exempt and some states don’t tax income at all. 403(b) accounts come with rules restricting when you can withdraw funds. This means that they’re not a good place to stash your emergency funds or, for that matter, any money that you think you’ll need before retirement.
With certain exceptions, taking distributions from your 403(b) before you hit age 59 1/2 will cost you a 10% penalty. What are those exceptions?
If you separate from your employer, you can roll over the funds in your 403(b).
If you die, your beneficiary can access your contributions.
If you encounter financial hardship, you may be able to make a withdrawal (in this case, you may only access elective deferrals taken from your pay, not contributions made by your employer).
If you are in the reserves and get called up, you may be eligible for what’s called a qualified reservist distribution.
If you become disabled, you can make a withdrawal.
Now here are the 403(b) Contribution Limits. For 2019, IRS contribution limits on 403(b) contributions are as follows:
For an employee’s elective salary deferrals, the limit is $19,000.
For total contributions, including salary deferrals and employer matching, the limit is the lesser of either $55,000 or 100% of employee compensation.
Employees aged 50 years old or over can make catch-up contributions of up to $6,000 on top of the regular limit.
Have you ever heard of a Roth 403(b)? A Roth 403(b) has similar attributes to the Roth IRA. You fund it with after-tax dollars, which means you don’t lower your taxable income, but the upside is that you don’t pay taxes on the money that you withdraw in retirement.
Not everyone who has the option to contribute to a 403(b) has the option to choose a Roth 403(b). If you do have the choice between a regular and a Roth 403(b), how do you choose?
As with the IRA vs. Roth IRA debate, it’s a question of your tax bracket.
If you think your tax bracket is higher now than it will be in retirement, it pays to save for retirement with pre-tax dollars. That means taking advantage of a regular 403(b). By doing so, you’re reducing your taxable income, which means you may owe less to Uncle Sam this year.
If, on the other hand, you think your income and tax bracket will be higher in retirement, you should probably go for a Roth 403(b). You’ll reduce the tax burden you’ll face in your post-work years. You also won’t pay taxes on the (possibly substantial) growth of your investments.
Thank you for joining us for this short video and remember to join us in part two for continued education on 403(b)’s!
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