If you are an employee of a public school or a nonprofit, you are likely familiar with 403(b) retirement plans. Like a 401(k), these plans allow participants to contribute pre-tax dollars throughout their careers in order to save up enough for retirement. But you can’t just stash as much cash as you’d like in these savings vehicles. There are 403(b) contribution limits.
You should be aware of the fact that this limit often changes from year to year to keep up with inflation.
Read on to see the 2018 contribution limits for your 403(b) and 401(k), what sets a 403(b) apart from other retirement plans and what to do if you want to save more for your retirement.
What Are the 403(b) Contribution Limits for 2018?
403(b) contribution limits consist of two parts: your contribution and your employer’s contributions. On your end, you can defer up to $18,500 from your salary to your 403(b) in 2018. If you exceed this contribution limit, the IRS will tax your funds twice.
There is an exception for employees over the age of 50. These workers can defer an extra $6,000 in 2018 as a “catch-up” contribution. In addition, some employers will permit those with more than 15 years of experience to contribute an extra $3,000. If you qualify for both exceptions, your extra contributions would first go toward the experience exception, followed by the age exception when tallying your 403(b) contribution limits.
The employer contribution limits are slightly more complicated. Employers can contribute to their employees’ 403(b) plans until the sum total of contributions reaches either $55,000 or 100% of all includible compensation for the employee’s most recent year of work, whichever is lower. Includible compensation is any taxable wages and benefits you earn.
Let’s say you’re a public school teacher, and your includible compensation is $40,000 in 2018. If you were to defer $10,000, then your employer would be able to contribute up to $30,000. If your salary were higher, say $70,000, and you still deferred $10,000, your employer would then be able to contribute up to $45,000. In reality, it’s unlikely that employer contributions would ever come near these limits.
A 403(b) plan is a retirement plan available to employees of public schools or organizations that qualify as tax-exempt charitable organizations. Its name comes from the same section of the Internal Revenue Code. Employees of nonprofit hospitals, churches and charities are the typical participants in 403(b) plans.
When it was first introduced, the 403(b) plan was also known as a tax-sheltered annuity, and participants could only purchase annuities through the plan. Since then, they have evolved to include mutual funds and other investment options beyond just annuities.
The primary difference between a 403(b) and 401(k) involves the type of employer that can offer each plan. The employers that can offer 403(b) plans are limited to those mentioned above, while a wide variety of for-profit organizations can offer 401(k) plans. This is why 401(k) plans are more common and recognizable.
What Should You Do if You Want to Contribute More?
If you’ve determined you need to be saving more than your allowable 403(b) contribution limits for your retirement, there are a couple of avenues you could pursue.
First, you could open a traditional or Roth IRA. These retirement plans come with their own contribution limits. In 2018, that limit is $5,500 for those under 50 and $6,500 for those 50 or older. Adding an IRA to your retirement plan would allow you to contribute up to $24,000 between both accounts.
You could also consider purchasing an annuity from an insurance company. Annuities aren’t limited by the same caps as a 403(b) contribution limits or a 401(k) maximums, and they can help to supplement retirement income. However, be sure to beware all the fees and commissions the insurers may attach.
Finally, you may be eligible for a 457(b) plan, which is offered to some tax exempt and government entities. This plan comes with its own $18,500 contribution limit, allowing you to increase the amount you can defer each year substantially.
403(b) plans can be great options because of their tax advantages and the high 403(b) contribution limits. While having access is dependent on your employer, they are good plans to consider if you have the opportunity.
As the contribution limits are currently $18,500 – without including employer matching – many people won’t feel the need to look elsewhere for even more savings opportunities. If you do, however, you have a few options like traditional IRAs and 457(b) plans to supplement your 403(b).
- Finding a financial advisor to help you navigate the limitations and benefits of various retirement plans can save you time and stress. With SmartAsset’s SmartAdvisor tool, you can answers a series of questions about your financial needs and preferences. Then, the tool will pair you with up to three qualified advisors in your area.
- If you can, make sure you’re taking advantage of your employer’s matching program for retirement contributions. Failing to capitalize on these programs is equivalent to turning away free money.
- In addition to planning for retirement, it’s a good idea to have an emergency fund with three to six months of expenses just in case. Keep this money somewhere accessible like a savings account.
Photo Credit: ©iStock.com/xavierarnau, ©iStock.com/designer491, ©iStock.com/shapecharge