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Retirement Calculator, Inc. provides the tools and resources necessary to assist you in making critical economic decisions regarding your retirement future.

403(b) Plans Demystified

Colleen Mulder-Seward, MBA
Retirement Calculator, Inc.
retirement403b.com

403(b) Plans Demystified

For those who have at least 15 years of service in a company with a 403(b) plan, and are planning for retirement, the amount of information available about your 403(b) plan can be dizzying. This article gives you the key items you need to know in a nutshell.

The current limits on 403(b) elective deferrals

Elective deferral limits

The amount you can contribute to your 403(b) plan account each year is determined by the IRS.

15-year rule

If you have at least 15 years of service with the employer maintaining your 403(b) account, the limit on elective deferrals to your 403(b) account is increased.

Catch-up contributions

You qualify to make additional catch-up contributions if you will have reached age 50 by the end of the year, and the maximum amount of elective deferrals that can be made to your 403(b) account have been made for the plan year.

The table below shows the contribution limits imposed by the IRS.

Year	Elective Deferrals Limit	"15-Year Rule" Limit	Maximum Amount Contributable (MAC) Limit	"Catch-up" Contributions Limit	Total Limit for those 50+ with 15+ years
2005	$14,000	$3,000*	$17,000	$4,000**	$21,000
2006	$15,000	$4,000	$18,000	$5,000	$24,000
The limit on elective deferrals is increased by the least of (1) $3,000, (2) $15,000, reduced by increases to the general limit you were allowed in earlier years because of this rule, or (3) $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years. *The maximum amount of catch-up contributions is the lesser of $4,000 for 2005 or your includible compensation minus your other elective deferrals for the year.

Minimum required distributions (MRD)

The Internal Revenue Code established these minimums to ensure that you actually use your Employer Sponsored Retirement Plan account balance for its intended purpose - retirement.

Unless an earlier date is specified by your plan, you must take your first withdrawal (MRD) according to the following table:

Age	Year of Interest Accrual	First MRD Date	Subsequent Years MRD	Penalty for not following MRD
70 ½	Post- 1986	By April 1 of the calendar year following the year in which you become age 70 ½ or the calendar year in which you retire	Must be made on or before December 31	50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.
70 ½	Pre-1987	Check with your employer, plan administrator, or provider to find out whether the post-1986 rule also applies to pre-1987 accruals. If not, a minimum amount of these accruals must begin to be distributed by the later of the end of the calendar year in which you reach 75 or April 1 of the calendar year following retirement, whichever is later.	Must be made on or before December 31	50% penalty tax on the amount that should have been withdrawn in each calendar year, in addition to regular income taxes.

The IRS issued final regulations relating to MRDs from retirement accounts (including 401(k) plan accounts, IRAs, and 403(b) plans) on April 17, 2002, with an effective date of January 1, 2003. The new rules resulted in new life expectancy tables with longer expectancy factors, which generally result in smaller required distribution amounts.

In General, your MRD is determined by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year, by an applicable life expectancy factor taken from the Uniform Lifetime Table.

Uniform Lifetime
For Use by: Unmarried Owners, Married Owners Whose Spouses Are Not More Than 10 Years Younger, and Married Owners Whose Spouses Are Not the Sole Beneficiaries of their plan
Age	Distribution Period	Age	Distribution Period
70	27.4	93	9.6
71	26.5	94	9.1
72	25.6	95	8.6
73	24.7	96	8.1
74	23.8	97	7.6
75	22.9	98	7.1
76	22.0	99	6.7
77	21.2	100	6.3
78	20.3	101	5.9
79	19.5	102	5.5
80	18.7	103	5.2
81	17.9	104	4.9
82	17.1	105	4.5
83	16.3	106	4.2
84	15.5	107	3.9
85	14.8	108	3.7
86	14.1	109	3.4
87	13.4	110	3.1
88	12.7	111	2.9
89	12.0	112	2.6
90	11.4	113	2.4
91	10.8	114	2.1
92	10.2	115 and over	1.9
Note: If the sole beneficiary for the entire year is your spouse, whom is more than 10 years younger, then the Joint Life and Last Survivor Expectancy Table should be used, which could reduce the MRD even further. See IRS Publication 590 - Appendix C for more details. Source: IRS Publication 590 - Appendix C

Example:

Mary is a retired 403(b) participant who turned 70-1/2 on March 31. On December 31 of last year, the ending balance in her 403(b) was $100,000. To calculate her MRD for this year, divide $100,000 by her life expectancy factor of 26.5 years. Her distribution amount is $3773.59.

Account balance

Life expectancy factor = MRD

Thus,

$100,000
26.5

= $3773.59

If your plan's withdrawal provisions allow, you may elect to take more than your MRD from your retirement plan in a given year. This overage can not be applied toward your MRD for the subsequent year. MRDs are subject to federal income tax and may also be subject to state and local taxes. MRDs distributions can not be rolled over into an IRA or employer-sponsored retirement plan.

Distributions received before age 59 1/2 are subject to an additional early distribution penalty tax of 10%, unless an exception applies. Consult a tax professional before accessing money in your 403(b) plan. Read Publication 571, Tax-Sheltered Annuity Plans (403(b)) Plans, for more information.

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Analysis of the Economics of Early Social Security Withdrawal

Robert J. Phillips
Chief Retirement Consultant

Deciding whether or not to take the early withdrawal of social security at age 62 can be difficult. If you need this income at 62 to fund your retirement the decision is fairly straightforward. Take it early! On the other hand, if you have another source of revenue to fund your retirement your decision will be primarily based on lifestyle, health and investment preferences.

Several factors can affect your decision. First is your life expectancy. If you are in good health and have a family history of living beyond 90 then waiting for full benefits may be best. Two other factors impact this decision. First and most important is the value of money or your expected return from your investments. If you are using other investments instead of social security to fund your retirement you should use the rate of return of these investments as your value of money. There is another way to look at the value of money. If you do not require the social security money to live, you can invest the distributions for the future. The rate of return of this investment is your value of money. If your investments will make larger returns such as stocks this would favor taking the early withdrawal.

The last factor impacting your decision is inflation. Social security includes an annual adjustment based on inflation. You cannot control this variable but you should be aware of its impact. If future inflation is significant it will favor a later full distribution

FREE Social Security Calculator:

Find Out Your Breakeven Age

We developed a calculator to assist in analyzing the impact of taking early benefits at age 62 or waiting for full benefits at age 66 to 67 depending on the year you were born...If you were born in 1960 or later your full benefits will begin at age 67 and your reduction for early benefits at age 62 will be 30%. If you were born between 1946 and 1960 your full benefits begin as early as age 66. We have included a chart that summarizes information.

To use the calculator you need to input your year of birth. You also need to input a value of money up to 10% and a projected inflation adjustment. The calculator analyzes income generated over time from both the early and full benefit investments. It calculates the age at which full social security will catch up and breakeven with the early withdrawal. If you were born before 1960 your breakeven age will be impacted by the year you were born. An early breakeven age favors waiting for full benefits.

The social security calculator is not the final answer whether to take an early withdrawal but it does give you additional economic data to assist in that decision. Ultimately you must balance income, investments and lifestyle to optimize your enjoyment during your retirement years.

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1 yr IRA CD	1.54%	1.57%
5 yr IRA CD	2.50%	2.41%

Retirement 403b

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