The 403(b) plan – also known as a tax-sheltered annuity plan – is a retirement savings vehicle primarily for employees of nonprofit organizations, including public schools, universities, hospitals and other charities. The plan is similar to a 401(k). Employers may contribute to the plan and employees may contribute pretax earnings, taking advantage of the tax-deferral benefits.
In general, the amount you can contribute to a 403(b) plan is determined by the Internal Revenue Service (IRS) – though your employer may limit the amount of your contribution. For the year 2023, the contribution limit for 403(b) plans is increasing from $19,500 to $19,800. If you’re age 50 or over, you may make additional catch-up contributions of $6,500, up from $6,000 in 2022.
403(b) Contribution Limits for 2023
For 2023, the contribution limit to a 403(b) account is $19,800. This limit applies only to elective deferrals made by the employee. Employer contributions, such as matching or discretionary contributions, are not included in this limit.
If you’re age 50 or older by the end of 2023, you may be eligible for an additional catch-up contribution of $6,500. This catch-up contribution is available to employees who have reached the age of 50 by the end of the calendar year. The catch-up contribution is separate from the elective deferral limit of $19,800. That means you may contribute up to $26,300 to your 403(b) account in 2023 if you’re age 50 or older.
How Much Can I Contribute to a 403(b) Plan?
When it comes to contributing to a 403(b) plan, the amount you can contribute depends on two factors: the IRS contribution limit and your employer’s contribution limit. The IRS contribution limit for 2023 is $19,800, plus the additional catch-up contribution of $6,500 if you’re age 50 or older. Your employer may further limit your contributions if they choose.
For example, your employer may set a limit of $10,000 for employee contributions. This means your total contribution for the year cannot exceed $10,000, even if the IRS limit is higher. It’s important to check with your employer to see if there are any additional limits on your contributions.
How to Calculate Your Maximum Contribution
The easiest way to calculate your maximum contribution is to add up the amount you’ve already contributed to your 403(b) plan and subtract that total from the IRS limit. For example, if you’ve already contributed $10,000 to your plan, then the maximum you can contribute in 2023 is $9,800 ($19,800 minus $10,000).
If you’re age 50 or over and eligible for the catch-up contribution, you’ll need to add that amount to the total. For example, if you’ve already contributed $10,000 to your plan and you’re age 50 or over, then the maximum you can contribute in 2023 is $16,300 ($19,800 plus $6,500).
Tax Benefits of Contributing to a 403(b) Plan
Contributing to a 403(b) plan offers several tax advantages. Your contributions are made on a pretax basis, meaning they are taken out of your paycheck before taxes are calculated. This reduces your taxable income, which in turn reduces the amount of taxes you owe. When you withdraw money from your 403(b) account at retirement, you will owe taxes on the withdrawals.
The tax benefits of a 403(b) plan are especially attractive for higher-income earners. For example, if you’re in the highest tax bracket of 37%, you’ll save 37 cents of federal income tax for every dollar you contribute to a 403(b) plan. That’s in addition to any state and local taxes you may also save.
Conclusion
The 403(b) plan offers a great way to save for retirement. The contribution limit for 2023 is $19,800, plus an additional catch-up contribution of $6,500 for those age 50 or over. By taking advantage of the tax benefits of a 403(b) plan, you can increase your savings and give yourself a more secure retirement.