If you have a 403(b) retirement plan, there are annual contribution limits that you must adhere to. For 2024, the total of your elective salary deferral contribution and your employer match amount cannot exceed $69,000.
What Is a 403(b) Retirement Plan?
Professionals employed in the nonprofit sector or at a public school may find that their best way to earn enough money to retire is through contributions to their 403(b) retirement plan. This is the nonprofit sector’s main retirement plan option. 403(b) plans are often called tax-sheltered annuity plans and apply to public educators and other workers who are employed at tax-exempt organizations.
With these plans, employees can put money aside for their retirement on a pre-tax basis. However, they are subject to annual contribution limits, which can change annually. The money added to a 403(b) plan has to be taken out of your paycheck on a weekly basis. Your employer will handle the account payments based on your instructions.
What Are the Annual 403(b) Contribution Limits?
Under the 2024 limits, the 403(b) retirement plan maximum contribution, as an elective deferral, is $23,000. However, if you are at least 50 years old or older, you are eligible to contribute another $7,500 per year, which is considered a “catch-up” contribution. Your employer’s 403(b) match limit is up to 25% of your salary per year.
Under this year’s maximum limits, the total of your elective deferrals and your employer’s matched contributions cannot exceed $69,000. Because they are indexed for inflation, these limits may change annually or periodically in order to remain in line with the economy.
Where this can get confusing is if you change jobs mid-year. For example, if you are only part of a 403(b) plan for seven months of the year and then move to a new employer who offers a 401(k), you’ll need to carefully track your contributions to both. The annual limits for 403(b) plans also apply to 401(k) plans. This means the current $69,000 limit would apply collectively, not separately. If you had $55,000 in your 403(b) for 2024, that only leaves $14,000 for your 401(k).
Your elective deferrals are looked at separately from your employer’s contributions as a match. Each is subject to its own tax treatment and limits. Your elective salary deferrals can be placed in a post-tax Roth 403(b) or a tax-deferred traditional 403(b) account, or even a combination of Roth and traditional. The key is that all salary deferrals must be equal or less than the annual maximum. Any matching funds from your employer are always placed in the tax-deferred portion of your 403(b) plan.
What Is the 15-Year Rule?
If you are an employee with 15 or more years of service with your current employer and your annual contribution amount doesn’t exceed $5,000 per year, you are eligible to contribute an additional $3,000 per year. There is a lifetime maximum “catch-up” of $15,000. This is where it gets the name “15-year rule.” The idea is to give people who have been slow to ramp up their retirement savings the opportunity to boost their annual contributions when they are able.
If you are over 50 years old, are eligible for the catch-up contribution, and have been employed with your current employer for over 15 years, you can also reap the benefits of the 15-year rule. Note, the IRS will apply any contributions made over the standard limit to the 15-year rule first.
Who Qualifies for a 403(b) Plan?
Per the guidelines set forth by the Internal Revenue Service, the following professionals are eligible for a 403(b) retirement plan:
Employees who are eligible under IRS Code Section 501(c)(3) tax-exempt organizations.
Eligible church employees.
Eligible employees at cooperative hospital service organizations.
Ministers who are employed under IRS Code Section 501(c)(3) eligible organizations.
Ministers (chaplains) who are employed by organizations that are not tax-exempt organizations under Code Section 501(c)(3) and are also functioning as ministers under their professional job duties as outlined by their employers.
Public school system employees that fall under Indian tribal organizations.
Eligible employees at public school organizations, which include universities, state colleges, public grade schools, junior high or middle schools, and high schools.
Potential Positive Attributes of a 403(b) Plan
The main options for investments in a 403(b) retirement plan are mutual funds and annuities, and they will continue to gain value tax-free until you go to withdraw them at retirement. If you are 59 1/2 years old or are 55 years old and are no longer on the job, you can take cash out of your 403(b) plan without concern about a 10% withdrawal penalty (note: the CARES Act has waived this penalty in 2020.)
Any money you withdraw from your 403(b) retirement plan is subject to federal taxes as standard income. However, it should still result in some financial gain as you are likely in a lower tax bracket once you’ve retired.
Tips for Investing In Your 403(b) Plan
Investing in your retirement should be a long-term strategy, and you need to plan accordingly. For example, the optimal time to consider withdrawing any money is after you reach age 59 1/2 as this is when you can take distributions without a penalty. Since you’re taxed on your distributions, monitor what tax bracket you’ll be in once you retire. Legally, you must start taking Required Minimum Distributions (RMDs) when you turn 72.
Get Assistance With Your 403(b) Retirement Plan
Do you own a business that qualifies to have a 403(b) retirement plan, or are you a client of Human Interest? Let us help you with all your retirement plan needs. We make it easy to implement a 403(b) plan at your organization, and we’re here to answer all your questions if you are an existing client of Human Interest. Contact us today to learn how Human Interest can assist or read one of our guides:
How to find the best 403(b) for your nonprofit
Launch a 403(b) plan for your nonprofit
The SECURE Act: 5 changes for 403(b) plans
