Employees of hospitals, schools, churches and certain nonprofit groups can sock away money in a 403(b) retirement plan. Originally, employers could only set up the plan through a life insurance company and the cash was funneled into an annuity. However, the custodial version of a 403(b) allows you to invest through a mutual fund company, giving you more control over your nest egg.
What It Is
Technically, the custodial account for a 403(b) is called a 403(b)(7) plan. The only difference between a traditional and custodial 403(b) is where you can invest your money. The "custodial" part is really just a fancy way of saying the mutual fund company gets your contributions and invests them in the funds you choose. All of the Internal Revenue Service rules that apply to a traditional 403(b) plan also apply to the custodial version, including the yearly contribution limits and withdrawal requirements.
Ins and Outs
As of 2013, you can kick in up to $17,500 a year, or $23,000 if you're age 50 or over. Although you still have to pay Social Security and Medicare taxes on the money you put in, Uncle Sam won't come knocking on the door asking for income taxes until you start taking the cash out. Like with any other tax-deferred retirement plan, once you reach 59 1/2, you can tap your account without facing a 10 percent early withdrawal. By April 1 of the year after you hit 70 1/2, you have to start siphoning the money whether you want to or not.
You'll need to jump through a slightly different set of hoops to set up a custodial account, compared with opening a traditional 403(b) plan. Your boss starts the process by giving you a signed 403(b)(7) service provider agreement. You'll also need to sign a salary reduction agreement for the amount you want to chip in every payday. Take the agreement to the mutual fund company you want, fill out an account application and pick funds from the list they give you. Your employer is responsible for sending payroll deductions to the fund company.
A mutual fund pools money from a bunch of investors, and the fund manager buys stocks, bonds or other investments with it. Mutual funds aren't as risky as throwing money into individual stocks, but they are riskier than stashing cash in a certificate of deposit. You may have to pay a fee to buy or sell shares. You can also expect an average yearly fee of about 1.4 percent on a mutual fund to cover operating costs, marketing expenses and brokerage fees. Read the prospectus the fund company gives you to find out what it charges and why.
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