A 403(b) account is also known as a Tax Sheltered Annuity or TSA. These accounts can take many forms, but most typically are setup as a fixed or variable annuity. Teachers, employees of non-profits, and certain ministers can contribute during their working years should their employer offer this retirement option. Other investment options might include mutual funds and/or indexed or variable annuity accounts.
Typically, 403(b) retirement accounts are conservative in nature – especially if they use a fixed or indexed annuity as their primary investment option. Deposits in fixed investments will not fluctuate with the whims of the stock market and thus provide safety for teachers and the others who invest in them. Conversely, variable annuities and mutual funds will rise and fall depending on market conditions.
The answer is yes. Retirement or separation of service from employment are both cause for transfer. Depending on your age, you can either rollover your funds to another TSA account or an Individual Retirement Account (IRA for short). Rollovers can be advantageous for those who want different investment options, higher guaranteed rates of return, continued tax deferral, and the ability to insure larger sums of money.
Yes, but it is only insured up to certain limits depending on the investment options chosen. Variable annuities and mutual funds are not insured whereas fixed and indexed annuities are insured by your resident state’s Life and Health Insurance Guaranty Association. Limits can vary by state, but fixed and indexed accounts are usually insured up to $250,000 per account. Most Associations allow for up to three accounts with three different annuity providers for a total insured maximum of $300,000 per individual.
Thus, if you own a 403(b) worth $300,000 at retirement, you can transfer $250,000 into one separate fixed or indexed annuity and invest $50,000 in a separate account. Although, there are many annuity accounts wiht well over $300,000 today. Conservative investors may consider taking advantage of this rule.
A rollover or direct transfer would not be a taxable event if the funds are deposited into a new qualified annuity or other qualified investment account. Qualified accounts are ones where the entire balance is subject to future income taxes. All withdrawals from a qualified account are taxed as ordinary income to the owner.
When the account owner reaches age 70 1/2, then the IRS requires what is called a Required Minimum Distribution (RMD) based on life expectancy. The IRS has created life expectancy tables for account owners and their beneficiaries detailing the percentage that must be withdrawn each year.
At passing a 403(b), TSA, or IRA will transfer to your named beneficiaries. In most cases a spouse can adopt the account as their own and will only need to take a distributions of he or she is 70 1/2. If the beneficiary is your child, then they can withdrawal the amount in a lump sum and pay income tax or rollover the funds into a Beneficial IRA. Beneficial IRA’s (sometimes called multi-generational IRA’s) will require mandatory distributions regardless of age, but can defer taxes on a majority of the accumulated funds for the child’s lifetime.
In summary, 403(b) owners including teachers and ministers have several options upon retirement. Working with a knowledgeable advisor can allow for better returns, insure large amounts, and pass funds to named beneficiaries with fewer taxable consequences.
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