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Begging For Help,
Anyone familiar with the tax angles weighted against controlled investment options (403b)

My new employer has a 403b with no employer contribution and you must choose between mutual funds (arrgh!) from American Fund Family.

The key points:
1. What are my maximum amounts allowable for both my 403b and a personal IRA (traditional or Roth)? Isn't there an annual limit?

2. Any insight on weighing the pro/cons of all 403b vs 403b plus using $4000 toward($2000 me & $2000 wife)a stock investment (Foolish Four?)directed IRA.

3. Any good American Fund mutuals? At least what is best?

My wife, 9 week son and I thank anyone with the time and know it all with your assitance.
ChuckFolly
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Managing Your Finances / Retirement Investing

Original Message
Subject: 403b (No -ER help) & IRA limits?
Author: ChuckFolly Date: 6/17/99 10:49 AM Number: 11357
Begging For Help,
Anyone familiar with the tax angles weighted against controlled investment options (403b)

My new employer has a 403b with no employer contribution and you must choose between mutual
funds (arrgh!) from American Fund Family.

The key points:
1. What are my maximum amounts allowable for both my 403b and a personal IRA (traditional or
Roth)? Isn't there an annual limit?

2. Any insight on weighing the pro/cons of all 403b vs 403b plus using $4000 toward($2000 me &
$2000 wife)a stock investment (Foolish Four?)directed IRA.

3. Any good American Fund mutuals? At least what is best?

My wife, 9 week son and I thank anyone with the time and know it all with your assitance.
ChuckFolly

Your Reply
Subject: Re: 403b (No -ER help) & IRA limits?
Author: moneylady
I'm not sure what you mean by " tax angles weighted against controlled investment options." But in answer to your questions:

1.The annual limit for your 403b is 20% of your net salary (net is the amount AFTER the 403b contribution has been taken out) or aprox 16.67% of your gross salary. The most anyone can contribute is $10,000 per year. At least this was 1998's limit. This is the amount for a person making aprox $60,000 a year. The money must be contributed from current salary. You may also always contribute to traditional IRAs, but in the case of the regular IRA, the deduction may be limited or possibly dis-allowed for you, subject to income limitations. If your spouse does not work, or does not participate in an employee contribution plan, she may be able to deduct her regular IRA of up to $2,000. There are income limitations for contributing to a Roth IRA that begin at $150k and phase out at $160k of modified adjusted gross income.
2. If you have made even $1 contribution to a 401k plan(or in your case a 403b,) you are considered to be subject to the income limitation rules for deductibility of a traditional IRA. For 1999 the phase out begins at $51,000 and at $61,000 you may no longer deduct YOUR IRA (this range only applies to married filing jointly-there are different ones for single folks and married filing separate.)
Pros for 403b:
-Greater potential current tax deferral than IRA.
-No AGI limits.
-You can borrow from your contributed money at a favorable interest rate for various needs (maximum $50,000.)
-Ability to Rollover to an IRA upon separation from employment.
-Potential employer match (maybe not in your case)
-Catch up provision often allowed after employment for 15 years which allows MORE than the usual $10,000.
Cons for 403b:
-Generally fewer investment choices.
-Must contribute "as you go."
Pros for IRA:
-Many investment choices.
-Possible tax deduction (subject to AGI limitations.)
-Possible withdrawals (not borrowings)of up to $10,000 without penalty for first home purchase, education, medical.
Cons for IRA:
-Limited contributions of $2,000 each.
It is usually best to participate in the plan. Of course if you have limited resourses and only have $4,000 a year to contribute, it probably makes sense to do the IRA. The IRA gives you almost unlimited options whereas with the 403b you are limited to the employer's offerings.
3. Don't discount the American Family. They are a well established company and have some respectable funds. And with a little pressure on your employer, they will often consider changing companies to suit the needs of their employees. Learn about some other non-profit employers in your area and what those companies are offering to their employees. Get together with some of your peers and make your case.After all, the boss will benefit too.
For a place to find out more about fund families on AOL,try keyword "morningstar."
Or on the web highlite and paste into your URL
http://www.quicken.com/investments/mutualfunds/finder/?page=Full
Hope this helps.

PS. If you contribute to a traditional IRA and are unable to deduct it, you must fill out Form 8606 along with your income taxes. There is a $50 penalty for failure to do this.
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Dear Moneylady,

I'm reaching for more enlightenment on 403b plans. My latest question is this:

What "annual compensation" figure is used to determine the allowable amount. I will be somewhere below 10,000 no matter what.

Options include:
1. My anticpated (and ultimately final) 1999 W-2 income, which includes non-403b organization income for 1/99 through 5/99.

2. My 1999 non-profit 403(b) company W-2 salary. Example 6/7/99 to EOY say $25,000.

or

3. My 1999 annualized 403b salary.

American funds offers a worksheet which uses "annual compensation" times EOY years & months (i.e. 7/12 for June to Dec)working for employer. The only help the form gives is slightly different from your previous note, which says: "Effective 1/1/98, compensation includes elective deferrals for purposes of determining the maximum exclusion allowance and maximum allocation (code $415) amount." This seems to say the full 20% is allowed now, not the net of contribution basis ~16.65%.

I don't want to over contribute, so what do you think is the correct basis for applying the 20%?

Much thanks,
ChuckFolly
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ChuckFolly writes:

<<I'm reaching for more enlightenment on 403b plans. My latest question is this:

What "annual compensation" figure is used to determine the allowable amount. I will be somewhere below 10,000 no matter what.

Options include:
1. My anticpated (and ultimately final) 1999 W-2 income, which includes non-403b organization income for 1/99 through 5/99.

2. My 1999 non-profit 403(b) company W-2 salary. Example 6/7/99 to EOY say $25,000.

or

3. My 1999 annualized 403b salary.

American funds offers a worksheet which uses "annual compensation" times EOY years & months (i.e. 7/12 for June to Dec)working for employer. The only help the form gives is slightly different from your previous note, which says: "Effective 1/1/98, compensation includes elective deferrals for purposes of determining the maximum exclusion allowance and maximum allocation (code $415) amount." This seems to say the full 20% is allowed now, not the net of contribution basis ~16.65%.

I don't want to over contribute, so what do you think is the correct basis for applying the 20%?>>


As I said before, unless your plan restricts your percentage limit or that limit is offset by an employer contribution made to the plan on your behalf, then the percentage limit is 25% (not 20%) of your gross compensation from your 403b employer. The absolute dollar amount is $10K. In your case, if you began that employment on 6/7/99, then the annual compensation figure you may use this year is that earned between that date and the end of the year (i.e., 25% of $25K, or a maximum of $6,250 in 1999). If indeed your plan or an employer contribution holds you to the 20% limit, then the maximum contribution this year will be $5K.

Regards..Pixy
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Pixy: You've stated emphatically that the Employee limit for salary deferrals into a 403b account is 25% or $10k, whichever is less. I just reviewed IRS Publication 571 and believe the "employee" limit is 20%. The "Employer" limit is 25%. Please verify...

Thanx, PP
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PP writes:

<<Pixy: You've stated emphatically that the Employee limit for salary deferrals into a 403b account is 25% or $10k, whichever is less. I just reviewed IRS Publication 571 and believe the "employee" limit is 20%. The "Employer" limit is 25%. Please verify...>>

Do you ever think you're absolutely positive about something and therefore don't have to look it up again? I did in this case. I just "knew" the limit for a 403b plan had been changed at the same time the 401k percentage limit switched from 25% of net compensation after contributions to 25% of gross compensation. Your query forced me to the books. There, much to my chagrin and embarrassment, I discovered the employee is still limited to 20% of compensation. You are totally correct in that only the combined contributions of the employee and employer may be 25% and only the employer -- not the employee -- may contribute the full 25%.

My apologies to all for the misleading comment, and my thanks to PeppermintPatty for catching the error. I am obviously beginning to suffer from hardening of the grey cells. I guess that's a function of the aging process. After all, I did just celebrate my 29th birthday a few months ago. It was my 31st anniversary of doing so. Who says the brain can't get hung up on some things? Fortunately, though, we have some very astute readers around to keep us factual.

Regards..Pixy
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Pixy,

Your verve and gusto is much appreciated. Just to twist the question, how about this. I was told that although I can contribute 20%, this is not of gross compensation, but of the gross compensation less the contribution. I think the math works out something like 16.66%.

Due to a note on an American Funds eligible contribution calculation page, I question if this twist might have been removed effective 1/1/98.

With all the review, did you come across anything on this?

Retirement tax law is mind numbing. I'll bet the legislature's pensions are exempt. No idea really, but wouldn't suprise me.
Thanks,
ChuckFolly
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Chuck: The basic rule-of-thumb for 403b contributions is: you may contribute, through salary reduction, up to 20% of gross earnings (including overtime, bonuses & pay differentials) to a 403b account, but no more than $10,000/year. This is a tax year calculation, so if your earn $30k/yr. and start work in July, you'll only have $15k earned in 1999 & only be allowed up to $3,000 in contribution this year!

p.s. if the mutual funds have a (front end) load, can you also buy them with the Class B shares (with back end load)? That way all your money would be invested.

Good luck, PP
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ChuckFolly asks:

<<I was told that although I can contribute 20%, this is not of gross compensation, but of the gross compensation less the contribution. I think the math works out something like 16.66%.

Due to a note on an American Funds eligible contribution calculation page, I question if this twist might have been removed effective 1/1/98.

With all the review, did you come across anything on this?>>


Yes, the restriction that stipulated the 20% of compensation was to be based on compensation remaining after that contribution was lifted as of 1/1/98 along with the same restriction that applied to 401k plans. Your contribution is now based on your gross compensation from the job having the 403b plan.

<<Retirement tax law is mind numbing. I'll bet the legislature's pensions are exempt. No idea really, but wouldn't suprise me.>>

LOL. I agree the myriad laws and regulations on retirement plans can be and are daunting. And I'm certain our illustrious leaders don't have half the problem in this area as the rest of us do, either. After all, they make the laws for everyone else, not themselves.

Regards..Pixy
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