403(b) Retirement Plan: The Legal Limitations
Public school employees, employees of certain tax-exempt organizations and ministers can use a 403(b) retirement plan, also known as a tax-sheltered annuity (TSA). They can be annuity contracts through insurance companies, custodial accounts that act similar to 401(k) plans or retirement income accounts set up for church employees.
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Benefits
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Contributions to a 403(b) plan are tax deferred because they are deducted from your income before your taxes are calculated. Taxes are paid on both the savings and account earnings when you begin making withdrawals from your account. However, your contributions are still taxed for Social Security and Medicare. You may also be eligible for a saver's credit on your taxes, which is like getting part of the money you contribute back.
Participants
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Participation in a 403(b) plan is limited to eligible employees of the following organizations: 501(c)(3) organizations, public school employees involved in day-to-day operations, cooperative hospital associations, civilian employees of the Uniformed Services University of the Health Sciences, public school employees for school systems on tribal lands and certain ministers. The minister must be self-employed or a full-time minister.
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Maximum Amount Contributable
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Your contributions are limited by both a maximum annual contribution and a maximum percentage that you can have deducted from your income. Your personal maximum annual contribution will be the lesser of those two limits. The maximum annual contribution in 2011 is $49,000 or all of your includable compensation for 2010. This is a limit on account holders rather than accounts, so if you have more than one 403(b) account, the total of all of your accounts must not exceed the limits. The maximum amount you can have deducted from your income is set by your salary reduction agreement with your employer. For 2011, the general limit on salary reductions is $16,500, but even this limit will increase as you gain more years of service with the same employer.
Catch-Up Contributions
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If you are 50 years old by the end of the calendar year and have maxed out your salary deductions to your 403(b) account, you can make catch-up contributions to your account. The maximum catch-up contribution is $5,500 for 2011. When figuring how much you have made in catch-up contributions, you need to consider catch-up contributions not only to your 403(b) accounts, but to other qualified retirement accounts, SEP plans and SIMPLE plans.
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