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withdrawn in each calendar year, in addition to regular income taxes.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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