A lot of people are familiar with 401(k)s, even though the name could not possibly be less catchy or memorable (if you didn’t know, it’s named for a tax code). Fewer people are familiar with 403(b)s, which are essentially retirement vehicles for those working for nonprofits, such as teachers, the military and other government workers. A 403(b) is very much like a 401(k), but there are some differences that are worth knowing if you work for a nonprofit, such as what the contribution limits are.
Contribution Limits for 403(b)s & the 15-Year Rule
In 2024, the contribution limit for a 403(b) is $23,000, which is the same as a 401(k) for this year. However, some workers are eligible to contribute to both a 401(k) and a 403(b). This is often because a worker moves from a job with a 401(k) to one with a 403(b), or vice versa. In these instances, total contributions for the year still cannot exceed $23,000. The exception is if you are 50 or over, and then you can make a catchup contribution of an extra $7,500, whether you have a 401(k) or a 403(b).
With a 403(b), however, some participants get yet another exception that’s an advantage you don’t get with a 401(k), and that’s possible eligibility for the 15-year catchup rule, which allows workers who are behind on their retirement savings to contribute an extra $3,000 to their accounts — even those under 50 years old. With this added $3,000, you are allowed to contribute a total of $26,000 to your 403(b) account for the year. You have to qualify for this exception first, however.
The first caveat is that you can only make this catchup contribution if your employer allows it, and many K-12 school districts do not. The second is that participation is limited to those who have not contributed more than an average of $5,000 per year to their 403(b) accounts. For instance, if you worked for your employer for 15 years and put nothing in most years, but $20,000 for four years, the total you have saved is $80,000. And $80,000 divided by 15 is greater than $5,000 per year, so you would not be eligible for this catchup contribution.
How Does 15 Figure into the Rule?
It’s called the 15-year catchup rule because in order to be eligible to make this extra contribution, you must have worked not only for a nonprofit, but also for the same employer for 15 years. So, you can’t work at one school district for 10 years and a different school district for five and make a 15-year catchup contribution. However, these 15 years with the same employer do not have to be consecutive. So if you left your job and returned at some point and still have a total of 15 years with that employer, you are eligible for the catchup contribution.
A second reason the 15-year rule is so named is because the maximum (lifetime) amount you can contribute under this rule is $15,000. So if you contribute $3,000 extra this year, you can only do it for four more years until you max out your 15-year catchup contributions.
This figure is not inclusive of the employer matching contributions — if you receive these. Employer contributions may vary, but total individual contributions plus your employer’s contributions are capped at $69,000. Additionally, this number cannot be larger than an employee’s salary. If your salary is lower than $69,000, contributions are capped at whatever that number is.
Traditional & Roth 403(b) Accounts
Many workers are attracted to a Roth retirement account, whether it is a 403(b), 401(k) or IRA. The reason for this is because Roth retirement accounts require contributions be made post-tax rather than pre-tax. For many years, this was not an option. Only pre-tax dollars could be contributed to retirement accounts, and taxes would be paid only upon withdrawal, in retirement. It can feel good to save money this way because you get to keep more of your paycheck each pay period. But what you save now in taxes, you’ll have to pay later. It sounds like simply a choice between when to pay your taxes, but it’s actually a little more than that.
Many younger workers are in a lower tax bracket. Right now, the largest group of U.S. taxpayers — about three-quarters of the population — is in the 15% federal tax bracket. The 10% and 20% brackets have about the same number of people in them, but many fewer Americans are in these groups — less than 15% each. So if you retire when you are in a 25% tax bracket, but you paid taxes on your retirement savings years ago when you were in a 10% or 15% bracket, you save money.
If your employer doesn’t offer a Roth 403(b) option, you can open your own Roth IRA. Roth IRAs have a contribution limit of $7,000 in 2024, but they can still be a handy little savings vehicle for your retirement. When you’re deciding whether to get one, take into consideration how much you’re putting into your 403(b) and what the employer match is (if any). If you’re contributing 10% to your 403(b) and your employer contributes 50% up to 6% of your salary, you may want to lower your contribution rate in order to reallocate some of your available retirement savings funds into a Roth IRA.
You probably don’t want to do this, however, if you have to dip below that 6% rate. That’s because if your employer contributes 50% up to 6% and if you’re only contributing 3%, 4% or 5% so that you can put money into an IRA, you’re losing those employer matching funds. And that’s free money.
401GO and 403(b) Accounts
Here at 401GO, we support nonprofits that want to sponsor an ERISA 403(b) plan for their employees. Nonprofits often have less choice when it comes to which plan administrator to choose because this decision often lies with a government entity or a board of directors. However, these entities are highly motivated to save money — a definite priority with nonprofits — and that’s why so many of them choose 401GO. Our fees are lower and our processes are simpler — all in an effort to make it easier for workers to save for retirement. Financial representatives of nonprofits interested in sponsoring a low-cost, easy-to-use 403(b) plan should contact us today.
