403(b) contribution limits
Most workers have heard of 401(k) plans and their usefulness in saving for retirement, but other tax-favored retirement savings vehicles are available to certain employees. For those who work in education, medical professions, or nonprofit organizations, many employers offer 403(b) plans.
403(b) plans are similar in many ways to 401(k)s, and one thing they have in common is that they enable you to make large contributions toward retirement.
For 2021, employees could contribute up to $19,500 to a 403(b) plan. This contribution limit increases to $20,500 in 2022. Those 50 and older can make a catch-up contribution of $6,500, bringing the total eligible contribution limit to $26,000 in 2021 and $27,000 in 2022.
In addition, some employers integrate into their plans an additional catch-up contribution option that allows those who have 15 years or more of service with the organization to make an additional contribution of up to $3,000.
Let’s look more closely at 403(b) plans to see how those who have access to these plans can put them to maximum advantage.
403(b) plans get their name from Section 403(b) of the Internal Revenue Code, which sets forth the tax breaks that they offer as well as the restrictions on the plans. 403(b) plans are available to public schools and employers that qualify as tax-exempt charitable organizations. Most of the workers you’ll find with access to 403(b) plans, therefore, tend to work for schools, nonprofit hospitals, and healthcare providers, and churches and other charities.
Roth or regular?
Traditional 403(b)s involve saving pre-tax money and letting it grow tax-deferred within the account. As an example, if your total income from work is $50,000, and you contribute $5,000 to your 403(b), your gross income will drop by that $5,000 to $45,000. Thereafter, you won’t have to pay income tax on the investment income that your 403(b) account generates. Only when you withdraw money in retirement will you pay income tax on what you take out.
Roth 403(b)s involve saving after-tax money and letting it grow tax-free within the account. As long as you meet the requirements, you’ll never pay tax again on Roth 403(b) money, even when you withdraw it in retirement.
Still, have questions?
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101
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