Back to School with Your 403(b) Program

August 31, 2010 (PLANSPONSOR (b)lines) - As the new school year begins, educators are busy organizing their classrooms and lesson plans, but “Back to School” season is also a perfect time to educate 403(b) participants in all markets about their retirement savings.

Starting Young  

While retirement may be decades away for younger employees, this group can still benefit in the short term by saving early during their career.  One immediate opportunity that exists is reducing taxable income.  By contributing to their employer’s 403(b) plan on a pre-tax basis, they can not only save up for distant goals, but they can lower their yearly income tax bill.  

Younger 403(b) participants may also qualify for a federal Saver’s Credit.  This Saver’s Credit allows lower- to moderate-income earners to offset part of the first $2,000 of their contributions, based on adjusted gross income (AGI) and federal income tax filing status.  The Saver’s Credit can reduce the amount of federal income taxes owed or increase the amount of their potential refund.  For 2010, the Saver’s Credit can benefit individuals filing jointly with AGI up to $55,500, single filers with AGI up to $27,750, and those filing as head of household with AGI up to $41,625.    

Those growing their careers should assess whether certain advancements warrant an update to their savings strategy.  Has a raise or promotion in the past year resulted in more compensation?  If so, make sure retirement savings keep pace with additional income by updating the salary reduction agreement to increase pre-tax contributions.  By adjusting 403(b) contributions with each salary increase, an investor can continue to reduce their tax liability as they build up their nest egg.  


Seasoned employees can take advantage of additional retirement savings opportunities targeted for specific ages and career milestones.      

Those with at least 15 years of service with their current employer may be able to contribute up to an additional $3,000 a year (to a lifetime maximum of $15,000) beyond this year’s IRS employee deferral limit of $16,500, if the employer’s 403(b) plan permits this catch-up feature.  Providers and IRS Publication 571 (Tax-Sheltered Annuity Plans (403(b) Plans) For Employees of Public Schools and Certain Tax-Exempt Organizations) have worksheets available to help determine an individual’s permissible contribution amount.   

Those who are at least 50 years of age by year-end and have already contributed their annual limit are eligible to save another $5,500 in 2010 as a catch-up contribution.  If a participant is eligible for both this and the 15-year service catch-up contributions in the same year, they must use the 15-year service catch-up before making any contributions based on their age.

Life Events   

Key life events can also be a good reason for participants to re-evaluate their 403(b) accounts and savings strategy.  For example, after getting married, a couple should coordinate how they are making contributions to their respective employers’ retirement plans.  Each will want to contribute enough to receive the maximum employer matching contributions available to them.  However, it’s worth knowing that deferrals to a 403(b) plan are not reduced by nondiscrimination testing.  Accordingly, contributing as much as possible to the 403(b) plan can further maximize a couple’s retirement savings.  

An employee's age and career stage may not only be factors for considering how to fine-tune a retirement savings strategy, but they can also dictate how an individual chooses to obtain information and education.  For example, some prefer personal assistance and a one-on-one approach to discussing their goals and needs.  Web-based calculators and paycheck modeling tools can help others who like a do-it-yourself approach or want a reference point before starting a conversation with a financial professional.    

Plan sponsors and advisers should see “Back to School” season as an ideal opportunity to provide 403(b) participants with helpful tips and insights to ensure they remain at the head of the class.                                                          

Linda Segal Blinn, JD, Vice President of Technical Services, ING 


(This material was created to provide accurate information on the subjects covered.  It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.  These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document.  The taxpayer should seek advice from an independent tax adviser.)