403(b) Plan Contribution Limits and Your Retirement Plan

Savers may need to put together hundreds of thousands, if not, millions of dollars in real wealth to maintain a comfortable lifestyle through their Golden Years. For many public and 501(c)(3) nonprofit employees, it is the 403(b) tax-sheltered annuity (TSA) plan that is the ultimate centerpiece for retirement income.

Onyx Investments will analyze the merits of each 403(b) plan and present recommendations accordingly. Serious investors acknowledge that the Internal Revenue Service (IRS) stands at the ready to demand and take its pound of flesh.

403(b) Versus 401(k) Plans

In effect, a 403(b) is a 401(k)-retirement plan for public and nonprofit employees. Most importantly, both 403(b) and 401(k) plans feature pre-tax, or tax-deductible contributions. In recent years 403(b) and 401(k) plans do offer a Roth feature, which does take in after-tax money and allow for tax-free withdrawals.

403(b) plan investment options are typically more limited – to special account annuity mutual funds. 401(k) and 403(b) are known for tax deferral, which means that savers are not responsible for paying taxes on capital gains and investment income, as they occur within the account.

401(k) and 403(b) distributions are taxed at higher, ordinary income rates. Withdrawals made before age 59 ½ are typically subject to a 10% additional tax penalty, although the 403(b) plan does grant exemptions for severance. In either case, the 403(b) / 401(k) to IRA rollover is a retirement rite of passage, as a means for greater control over investment options.

401(k), 403(b), and IRA savers all must begin taking required minimum distributions and paying taxes at age 73. Here, penalties are severe, with the IRS levying a 50% tax on any monies that should have been taken out, in accordance with your life expectancy.

Base Contribution Limits

Both employee elective deferrals and employer contributions will be deposited into your 403(b) account. Expect for cash-rich corporations to offer more generous 401(k) matching, while nonprofit 403(b) terms allow for earlier vesting.

For 2024, 403(b) pre-tax base employee contributions are capped out at $23,000 across all employer-sponsored plans. Total 2024 403(b) employee and employer contributions are limited to the lesser of $69,000 or your annual salary.

Unlike FDIC insurance, savers may not open multiple 401(k) and 403(b) retirement accounts at multiple employers, with the sole intent of expanding the allotted $23,000 employee contribution limit. Employers, however, may each contribute towards the $69,000 employee – employer cap for the year for each account, irrespective of the actions of your other employers.

15-Year Service Rule and Catch-up Contributions

The 15-year service rule is specific to 403(b) plans. Here, long-tenured public and 501(c)(3) employees with at least 15 years of work experience at one post may be able to make an additional $3,000 in annual 403(b) contributions, up to $15,000.

Be further advised that 15-year service contribution limits may be reduced according to the dollar amount of previous contributions made at the same employer-sponsored 403(b) plan.

Savers turning at least 50 years of age by the end of the 2024 tax year may commit to making an additional $7,500 in catch-up contributions, on top of the $69,000 employee-employer base and five-year rule limits.

Consult with your human resources department and 403(b) plan sponsor to prepare and present these complex calculations.

Financial Strategy

Middle aged employees are often times encouraged to max out 403(b) plan contributions, with the retirement finish line finally in sight. Here, well compensated workers immediately benefit from lesser taxable income, while also expecting to retire and take distributions at a lower and more accommodative tax bracket.

Young professionals may be served best by contributing up to the 403(b) match and then plowing excess funds into an outside, Roth IRA account with limitless investment options. The Roth IRA, again, allows for tax-free withdrawals, which will be more beneficial for young savers legitimately expecting to grow future earnings power over time, before retiring in a higher bracket.

Onyx Investments recommends putting away at least 15% of your gross income towards retirement savings and investments.