As an employee of a public school or a 501(c)(3) non-profit organization, you have the opportunity to increase your retirement investments with the 403(b) plan. This approach provides a smart retirement savings strategy by combining pre-tax, salary-deferral contributions with tax-deferred earnings.

The 403(b) plan is designed to help you save tax dollars. Your contributions are not subject to current federal taxes and you enjoy tax-deferred compounding of any investment earnings until you make a withdrawal. Your money only becomes taxable when you begin taking withdrawals, usually at retirement.

The Teacher Retirement System of Texas (TRS) offers two programs, DROP and Partial Lump Sum Option (PLSO) that allow retirees to reduce their monthly pension in return for a lump sum of cash at retirement. That lump sum can be "rolled over" to an IRA, the income from which can be used to supplement your pension. Furthermore, taking DROP or PLSO allows you to pass a portion of your pension on to your children or to your favorite charity when the time comes.

Dearborn & Creggs representatives have the expertise to help you decide whether DROP/PLSO is right for your. For assistance on this or any other TRS questions, please contact us.

Here are few questions and answers about the 403(b) plan:

How does this plan work?

The 403(b) plan allows you to authorize your employer to make pre-tax, salary deferred contributions to your account. You decide the amount you wish to invest for your future and your employer remits this amount to an individual account created by you. You, along with your financial advisor, select the appropriate investment vehicle. All your earnings then accumulate tax deferred.

How much can I invest?

All participants in Tax Sheltered 403(b) plans are eligible to shelter 100% of their compensation up to certain limits. First there is a base amount. In 2003 the base amount is $12,000. This rises by $1000 per year until 2006 when the base amount is capped at $15,000. In addition, if you attain age 50 or greater in 2003, you may take advantage of the “age 50+ catch-up” by increasing your contribution by an additional $2000. This catch-up increases by $1000 per year until it reaches $5000 in 2006. If you have 15 or more years of service with your current employer and have not made full use of your contribution amounts, you may be eligible for the “special election.” This additional "catch-up" is a maximum of $3000. Therefore, in 2003, you may be eligible for a total contribution to your 403(b) account of $17,000. The maximum climbs to $23,000 in 2006. Your Dearborn & Creggs representative can help you determine your maximum contribution amount.

Can I adjust my contribution amount after my plan has begun?

Yes. Participants in 403(b) programs are permitted to make more than one salary-deferral election per year. Your employer can provide you with details regarding your plan.

Can I continue this tax-advantaged plan if I leave my present employer before retirement?

Yes. Should you go to work for another 403(b)-eligible employer, you can resume contributions to your existing plan or transfer assets into a new plan. If your new employer is not eligible, you can maintain your present account or roll over your 403(b) plan into an IRA.

When can I begin withdrawing from my account?

The 403(b) plan allows you to withdraw from your account for the following reasons:

• Attainment of age 59 ½
• Disability
• Death
• Separation from service with your employer
• Financial hardship
• Divorce

Do withdrawals have restrictions?

Yes. A 403(b) plan is meant for retirement, so if you begin withdrawing your money before you reach age 59 ½, a "premature distribution" penalty tax may apply. A premature distribution will be taxed as ordinary income and may be subject to an additional 10% IRS-imposed penalty. Early withdrawals may also have investment consequences that you should evaluate carefully before a withdrawal decision is made.
Granted under a divorce settlement (QDRO)

Can I obtain a loan from my account?

Yes. A 403(b) plan offers a loan provision that generally requires that the maximum loan amount is the lesser of 50% of your account balance or $50,000, while the minimum loan amount is $1,000. If you have a 403(b) plan and would like a loan, please request an information sheet from your representative.

The Dearborn & Creggs team will gladly answer any additional questions you may have and discuss how the 403(b) plan can work to achieve your goals. Please contact our office at (281) 277-6400 for personal assistance.