Contribution Limits
The maximum amount you can contribute to a 403(b) plan from your salary for 2022 is $20,500 (up from $19,500 in 2021). If you’re 50 or older, you can add a catch-up contribution of $6,500. In addition to the employee contribution limits, more money can be added to a 403(b) if your employer offers to match contributions. For plans that provide an employer match, the total contribution limit is the lesser of $61,000 in 2022 (up from $58,000 in 2021) or 100% of your compensation for your most recent year of service.
Benefits of Contributing to a 403(b)
The primary benefit of 403(b) plans is that contributions are made through pre-tax salary deferrals, so you get the benefit of your money growing tax-free, as well as lowering your taxable income for the year. These plans used to be primarily invested in annuity contracts, with a separate account for fixed or variable rate of return investments. Now, the majority of 403(b) plans offer mutual fund investment options within custodial accounts. While some 403(b) plans still offer annuity investments, the use of diversified investment lineups of mutual funds is very similar to the structure of traditional 401(k) plans. If you work for a company that offers a 403(b), you can help strengthen your retirement savings by taking advantage of dollar-cost averaging, which is when investors make periodic contributions to their investment or retirement accounts to offset the impact of market volatility. This is especially helpful for new or hands-off investors because it eliminates the need and urge to time the market and make irrational investing decisions.
Designated Roth Account
The designated Roth account (DRA) program allows organizations to designate 403(b) plan contributions as Roth contributions. Contributions are made with after-tax dollars, so there’s no current-year tax deduction. However, earnings grow tax-free, and you can withdraw your money without any penalties as long as you are at least 59 1/2 years old, and it’s been five years since your first Roth 403(b) contribution. You’re eligible for a rollover to a Roth IRA at retirement to avoid taking required minimum distributions, but unlike a Roth IRA, there are no income restrictions.
Differences Between 403(b) and 401(k) Plans
401(k) and 403(b) plans are more similar than different these days, but this wasn’t always the case. The Economic Growth and Tax Relief Reconciliation Act of 2001 eliminated previous differences between these two different types of retirement plans. However, one special election—referred to as the 15-year rule—is still in effect for 403(b) plans if the employer permits it. This special lifetime catch-up provision allows employees with 15 or more years of service with the same employer to contribute an additional $3,000. Under rules as of 2022, this catch-up provision can’t exceed $3,000 per year, up to a lifetime maximum of $15,000. If both the age 50 and the 15-year catch-up provisions are available, any contributions that exceed the $20,500 annual limit for 2022, or $19,500 for 2021, will first be applied using the 15-year rule, followed by the age 50 catch-up.
