How the IRS is Changing Your 403 (b) Retirement Plans
May 12, 2022 - Douglas Myser
It can be difficult to keep up with all of the changes that happen in our lives, especially when it comes to retirement planning. That’s why it’s important to stay informed about how the IRS is changing your 403 (b) retirement plans and what you need to know in order to prepare for the future.
In an effort to streamline the regulation that governs how retirement accounts can be used, the IRS has proposed a change for 403 (b) plans--a type of workplace retirement plan used mostly by public and non-profit employees. Employer sponsored plans are powerful retirement tools and boast specific requirements regarding required minimum distributions and tax treatment that vary depending on the type of account. But soon your 403 (b) may resemble the more common 401 (k). If you have a 403(b) retirement plan, you might need to change how you've planned for retirement and how your plan beneficiaries will receive their funds. IRS to change 403 (b) retirement plans.
In accordance with the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, the IRS is proposing updates to the existing retirement plan code that governs required minimum distributions. Currently, 403(b) plans are still treated differently from 401(k) plans, with provisions that trigger special exemptions for the non-profit and service sector organizations that sponsor these plans for their employees. The IRS historically treated 403(b) plans like individual retirement accounts (IRAs), not requiring account holders to withdraw all their funds over their lifetimes and allowing savers to invest in a wide variety of financial products with tax deferred dollars. However, with changes ushered in by the SECURE Act, both 40a(k) plans and IRAs now require the participant to take minimum required distributions by age 72. Roth IRAs continue to be an exception.
In order to make 403(b) plans more like the other defined contribution plans, the IRS is proposing a new requirement starting at age 72, or upon retirement, account holders will be required to take minimum distributions based on published life expectancy guidelines.
What Is a 403 (b) Retirement Plan?
A 403(b) plan is an employer-sponsored retirement plan for employees of public schools and certain tax-exempt organizations. Contributions are made pre-tax or after-tax depending on the type of account, and then invested in mutual funds, annuities, or other investments of choice. Earnings grow tax-deferred until withdrawn from the plan at retirement age.
Changes To The 403 (b) Retirement Plans
The IRS has recently announced some changes to its rules concerning 403(b) plans that will take effect in 2020. These changes include allowing employers to offer Roth contributions—after-tax contributions—and allowing catch-up contributions over and above the standard contribution limit. Additionally, employers must now provide an annual notice informing employees of their rights and responsibilities as well as any changes or modifications to their individual plans.
What You Need To Know
You should make sure you understand how these new rules affect you by reviewing your own plan documents, speaking with your employer or financial advisor if necessary. It's also important that you review your current investment options and determine if they are still adequate for your needs as well as any new options that may become available with these changes. Finally, if you haven't already done so, you'll want to consider putting together a retirement savings strategy that aligns with both current and upcoming regulations so that you can maximize your potential benefit from these plans.
The new regulations surrounding 403(b) plans are an important step forward for those who are looking to save money for retirement but don't have access to traditional 401(k) plans offered by many employers. By understanding how these changes will affect you now and into the future, you can be better prepared for when it's time to start planning for life after work. Make sure you're taking full advantage of all available opportunities by staying up-to-date on the latest information so that you can get the most out of your retirement savings plan!
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