Roger Rogers, 46, works for the local public school teaching Physics to advanced science high school students. Roger has been with the school for 21 years, earns $65,000 per year, and has never contributed to the 403(b) retirement plan that is offered. The 403(b) plan offers dollar for dollar matching on all contributions. The school district is considering adopting a 457 plan.

A.Which plan will offer Roger the highest tax deferral in 2020?

B.If Roger's wife makes enough money for them to live on and they decide to save as much of his income as possible, how much is the maximum that he can defer in tax-deferred retirement savings vehicles assuming the school adopts the 457 plan?

C.What type of investment is Roger permitted to make in the 403(b) plan?

D.What type of employers may adopt a 403(b) plan?

E.What types of employees benefit the most from the implementation of a 403(b) plan?

Answer A -

Retirement Plan 403 (b) is generally offered to employees of public schools and tex exempt organisations.

Also to nonprofit workers in non government jobs, example teachers of public and private schools.

Contributions to plan 403(b) are made from pre tax dollars, but they are subject to earlt withdrawl penalty of 10% (except exceptional situations such as financial hardships, disability) if distributions are taken before the age of 59.5 years.

Retirement plan 457 is generally offered by state government, local government, and employers of non profit organisations, basically offered to government public service employees.

Contribution to these plans are made before taxes, the money grows tax deffered. At the time of withdrawl taxes are paid at the marginal rate.

Under this plan there is no early withdrawl penalty attracted in case of early withdrawl.

The contribution limits under both the plans are same in year 2020- $ 19000. Also additional contribution of $6000 per year is allowed if you are above 50 years of age.

The additional contributions above the basic contributions differ under both the plans:-

Under 403(b) - an extra $ 3000 is allowed if you have tenure of 15 years and during the tenure less than $ 5000 has been contributed per year.

Under 457 - An additional contribution of $ 39000, if you are within three years of your retirement.

Here Roger is 46 years old, so he is not within three years of his retirement, hence under plan 457, no additional contribution would be allowed. Whereas under plan 403(b), his tenure is more than 15 years and if his contribution has been less than 5000, he would be allowed the additional contribution and if he does not have any plans for early withdrawl, plan 403(b) would be more beneficial.

Answer B -

Under plan 457, Roger would be allowed a pre tax contribution of $ 19000 in year 2020. Sine his age is 46 he would not be allowed contribution of $ 6000 per year. Also he is not within three years of his retirement, hence $ 39000 contribution also not allowed.

Answer C-

Investments permitted under the plan 403(b) are Money market funds and Mutual funds. Fixed and variable contracts which offer fixed and variable annuities. Investments such as stocks and real estate investment trusts are prohibited under this plan. They can invest in stocks but indirectly through mutual funds and not directly.

Answer D

- Plan 403(b) is a tax advantaged plan which can be adopted by non profit organisations, tax exempt organisations such as public educational organisations, religious organisations, cooperative hospital service organisations and self employed ministers.

Answer E

- Employee that benefit from plan 403 (b) are employees of public schools and tax exempt orgnisations such as teachers, school administrators, professors, nurses, doctors etc. They also beneift workers from charities and also ministers from some religious organsations.