403(b) Frequently Asked Questions

Internal Revenue Code Section 403(b) authorizes a tax-sheltered retirement program using a payroll reduction system. It is designed to help employees of public schools, community colleges, state universities and non-profit 501(c)(3) organizations such as hospitals, churches, private schools and colleges set aside money regularly toward their retirement.

In addition to saving for your retirement, you'll also save on current federal income tax. Every dollar contributed to a 403(b) program is a dollar reduction in current-year taxable income. For example: $200 per month for 12 months equals a $2,400 reduction in current-year taxable income.

Additional Benefits
In addition to the immediate tax savings on every dollar contributed to a 403(b) program, investment earnings (interest, dividends, capital gains, etc.) are also not taxed until they are withdrawn.* This is known as tax-deferral.

* A penalty tax may be imposed for early withdrawals.

This is a hypothetical table designed to reflect the benefits of investing in a 403(b) program. Summary: As your tax rate grows so can your tax savings by contribution over time.

• Mutual Funds
• Fixed annuities
• Variable annuities

No. Contributions under a salary reduction agreement are current "wages" for Social Security purposes and are subject to Social Security tax. Distributions will not affect your future Social Security benefits.

Generally, you may choose to reduce your salary by any amount that does not exceed the lesser of two limitations:

• 100% of your salary, or
• The elective deferral limit for the year as shown below:

If you are 50 or older on December 31 of a given year, you can contribute an additional amount as follows:

For example, employees who are age 50 or older by the end of the year can contribute $22,000 ($16,500 plus $5,500 catch-up) assuming they make at least $22,000 in salary that year.

Also, certain employees with more than 15 years of service may be allowed to contribute additional amounts. Ask your Lincoln Investment financial representative for details.

Your Lincoln Investment financial representative has a software program that will calculate your maximum annual contribution (MAC) limit. This program is designed to inform you of the maximum allowed contribution to your 403(b) program.

Yes, the amount of your contribution may be changed by submitting a new salary reduction agreement with your employer.

There is a 10% penalty for withdrawal prior to age 59 1/2 which is paid to the IRS when you file your income tax return for the year. However, there are certain exceptions to this penalty. The exceptions are distributions due to:

• Death [proceeds distributed to your beneficiary(ies)]
• Disability (defined under Section 72(m)(7) of the Internal Revenue Code)
• Separation from service after attaining age 55
• Substantially equal withdrawals extending over your life expectancy (beginning after your separation from service)
• Certain large medical expenses
• Qualified Domestic Relations Order (i.e., divorce and/or property settlement)
• IRS levy

Most 403(b) plans allow you to borrow from your 403(b) mutual fund accounts at a low interest rate. Loan provisions are available in Lincoln Investment's Retirement SOLUTIONS platform. Loan terms require that:

• The loan is paid back within five years and
• Loan repayments are made in substantially level amounts monthly.

Since you are borrowing from your own assets, interest payments on loans are not deductible. There are limits on the amount you can borrow and both principal and interest must be repaid to your account. If you default on a loan from your 403(b), the outstanding loan amount will be deemed a plan distribution and will be taxable. Contact a Lincoln Investment financial representative for more details.

If your salary reduction contributions exceed the elective deferral limit applicable for the taxable year, you must receive a corrective distribution of the excess (plus earnings) before the following April 15. The earnings will be taxed in the year they are distributed to you.

Yes, if allowed by your employer's plan. If you have a Lincoln Investment 403(b), you can transfer to one of the approved Retirement Plan Vendors; however, proper procedures must be followed. Your Lincoln Investment financial representative will handle the entire transfer process.

When you become eligible to receive a distribution from your 403(b) program, you may elect to roll your distribution into an IRA, another 403(b) program with your new eligible employer or the qualified retirement plan at a subsequent employer.

If you agree to a "direct rollover" into an IRA or another 403(b) or qualified plan, you can avoid federal income tax withholding on the amount rolled over. If you do not "directly rollover" your account, the amount distributed from your 403(b) account may be subject to a mandatory 20% withholding for federal income tax purposes.

Due to the complex rules, you should consult with your tax advisor before you make a decision.

Generally, distributions may be taken in a lump sum or in installments such as monthly or quarterly payments.

Your distribution will be taxed as ordinary income in the year received. Amounts remaining in the account will continue to grow tax-deferred until distribution.

Federal income tax withholding applies only when a distribution occurs or is deemed to occur. Therefore, in the case of a transfer or direct rollover, withholding does not apply.

If you receive a distribution that is eligible to be rolled over from your 403(b) program, a 20% mandatory income tax withholding will apply. If you receive a distribution that is not eligible for rollover (for example, if you receive a death distribution and you are a nonspouse beneficiary), the 20% mandatory withholding does not apply. In these cases, special voluntary withholding rules apply.

For example, if your distribution (which is eligible for rollover) is $10,000, only $8,000 will be paid to you. The $2,000 difference will be sent to the IRS as mandatory income tax withholding. Within 60 days of receiving the $8,000, you may roll over the entire $10,000 to an IRA, another 403(b) or a qualified retirement plan. To do this, you roll over the $8,000 you received, and you will have to find $2,000 from other sources (your savings, a loan, etc.). In this case, the entire $10,000 is not taxed until you take it out of the new plan. You will still report the $2,000 as tax withheld, and it will be credited against any income tax you owe for the year of the distribution.

Due to the complex rules for distributions, you should consult with your tax advisor before you act.

Generally, by the April 1 following the calendar year in which you attain age 70 1/2 or the April 1 following the year you retire — whichever occurs later — you must either:

• receive the entire balance in your 403(b) program, or
• begin to receive distributions from your 403(b) program

Since the rules governing the minimum distribution requirements at age 70 1/2 are complex, you should consult your tax advisor.

The current value of your account becomes the property of the beneficiary(ies) you designated prior to your death. Account proceeds are not subject to probate if there is a named beneficiary.

Options at death depend on who the named beneficiary is, as well as whether or not the death occurred before or after the required beginning date for distribution (i.e., 70 1/2). Some examples of options are:

• Spousal beneficiaries can:
  • Take a lump sum withdrawal
  • Take distributions over life expectancy
  • Roll into an IRA and avoid all current federal income tax
• Non-spousal beneficiaries can:
  • Take a lump sum withdrawal
  • Take distributions over life expectancy
  • Take distributions over five years