403(b)(7) Accounts
In 1958, Section 403(b) of the Internal Revenue Code provided employees of 501(c)(3) non-profit institutions the opportunity to establish retirement savings programs by deferring pre-tax dollars to tax sheltered annuities. In 1974, Congress added paragraph (7) allowing employees to set up custodial accounts directly with mutual fund companies. For exact Internal Revenue Service wording, refer to IRS Publication 571, Tax Sheltered Annuity Programs. You can obtain this document by calling (800) 829-3676 or by visiting the IRS web site at www.IRS.gov.
- What do we do for your 403(b)(7)?
- How does a 403(b)(7) Custodial Account work?
- Who can establish a Principal Trust Company 403(b)(7)?
- How do I establish a Principal Trust Company 403(b)(7)?
- How much can I contribute?
- What types of contributions are permitted in the Principal Trust Company 403(b)(7)?
- When can distributions start?
- What is a Hardship Withdrawal?
- Can I roll over money from my IRA?
What do we do for your 403(b)(7)?
Our services include:
- Custodial services (including preparation of IRS Form 1099-R)
- 403(b)(7) custodial document and applicable forms
- Processing transfers and rollovers
- Notice of required minimum distributions and free calculation on request
- Toll-free number for customer service
How does a 403(b)(7) Custodial Account work?
You set aside money for retirement on a pre-tax basis through a salary reduction agreement with your employer. You choose from the mutual fund investments offered by your designated brokerage firm, and your employer sends your contributions to the brokerage firm to be invested. Contributions and investment earnings grow tax deferred until withdrawal (assumed to be retirement) at which time they are taxed as ordinary income.
Who can establish a Principal Trust Company 403(b)(7)?
Employees, former employees, or retired employees of a qualified employer who maintains a non-ERISA (Employee Retirement Income Security Act of 1974 as amended) 403(b) plan.
How do I establish a Principal Trust Company 403(b)(7)?
Execute the 403(b)(7) Application and Asset Transfer Authorization form. The employer sponsoring the 403(b)(7) must sign these forms. Give them to your broker with any applicable fees to open the account.
How much can I contribute?
There are two ways to calculate the amount that may be deferred. Generally, these are the lesser of the following:
- 402(g) limit as indexed:
Year Amount 2006 $15,000 2007 $15,500 2008 $15,500 Additional "catch up" contributions, may be made by individuals over age 50, as follows:
Year Amount 2006 $5,000 2007 $5,000 2008 $5,000 - 415 limit: the lesser of 100% of compensation or $46,000 for 2008 and indexed in $1,000 increments each year thereafter.
We recommend that individuals consult IRS Publication 571 and/or a tax advisor or attorney to determine what contribution limits apply to their specific situation.
What types of contributions are permitted in the Principal Trust Company 403(b)(7)?
Transfers, direct rollovers, and employee deferrals are permitted. Since these are non-ERISA plans, no employer contributions are permitted.
When can distributions start?
Distributions from the 403(b)(7) may occur if there is a special event such as:
- Attainment of age 59½
- Death or disability
- Separation from service
- Divorce (QDRO required)
- Financial Hardship
What is a Hardship Withdrawal?
If the 403(b) plan permits this type of withdrawal, it is available to employees who have an immediate and heavy financial need. There are specific definitions of this financial need which may include certain medical expenses, post-secondary education fees, and housing needs. There are also specific conditions that may apply when the employee satisfies the requirements for financial hardship.
Can I roll over money from my IRA?
Yes. The money from most retirement plans can now be rolled into a 403(b)(7). Some types that cannot be rolled over include:
- Roth IRA
- After tax money in an employer plan or traditional IRA
NOTE: This information should not be construed as providing individual tax or legal advice. Please consult with your own tax advisor or attorney regarding your individual situation.
