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How Much Should You Contribute to Your 403(b) Plan?

20 May - Posted at 22:06h in Retirement

If you are a teacher, professor, school administrator, hospital employee, or other public servant, you have likely been offered a 403(b) retirement savings plan by your employer. Understanding the ins and outs of a 403 (b) plan gets complicated. The retirement planning experts at Appreciation Financial can answer all of your 403(b) questions.

If you have a 403(b) plan, you know how confusing it can be to understand the plan, the contribution limits, the taxes, the withdrawal rules and regulations, and more. Knowing how much you should contribute to your 403(b) plan can be a great starting point on the journey to understanding your 403(b) plan as a whole.

First, a Recap: What is a 403(b) Retirement Plan?

A 403(b) retirement plan is also known as a Tax-Sheltered Annuity or TSA-plan. Employees and their employers can contribute to these plans as they normally would with a 401(k). Employer participation in contributions may vary from district to district. The 403(b) plan allows for pre-tax contributions, and the maximum contribution limit in 2021 is $19,500 (proportional to the annual cost of living), just as with the 401(k).

The Difference Between a 403(b) and a 401(k)

Though there are other, more subtle differences, the main difference is this: unlike the 401(k), the 403(b) plan is only offered to the employees of 501(c)(3) tax-exempt organizations. Some examples are public schools, co-op hospitals and government agencies. Those employees might also be able to contribute to a 401(k), but employees of for-profit organizations may not invest in a 403(b).

How Much Should You Contribute to Your 403(b) Plan?

The answer to this question will be different for each person. There are a lot of factors that go into the decision of how much to contribute to your 403(b) retirement plan. You'll need to consider your salary and overall budget, your living expenses, your current age and intended retirement age, your retirement goals, and the maximum contribution limits each year, as well as your employer's contributions.

Age and 403(b) Contributions

If you are a young person just starting out in the workforce, you may choose to contribute less towards your 403(b) retirement plan in the beginning, as you may be paying off student loans or working on building a nest egg, buying a house, or starting a family.

You can work your way up to larger contributions as you become more financially stable over the years. Because your salary might start off lower in your first few years of employment, you might want to wait until your salary grows before you start making larger contributions.

Maximum 403(b) Contribution Limits

While you may not know the minimum amount that you should contribute towards your 403(b) plan, the IRS makes the maximum amount easy for you to determine, as it sets a contribution limit for each year. For 2021, the maximum amount an employee can contribute to their 403(b) retirement plan is $19,500.

If you are over the age of 50, you can elect to invest a $6,500 “catch-up” contribution in addition to the $19,500. If you choose to make a catch up contribution, your contribution total may not exceed $26,000. When you make your withdrawals from your 403(b) account (usually in retirement), they are subject to regular income tax.

Employers may also elect to make contributions towards their employees' 403(b) plans. The maximum contribution employers can make to employees' plans is $38,500, assuming the worker has maxed out their contributions. However, not all employers offer contribution matching or employer contributions, so be sure to check with your employer before using that amount to determine how much you should contribute each paycheck.

Meet with a Retirement Planner

Need help determining how much you should contribute to your 403(b) retirement plan? Talk to one of our certified Appreciation Financial agents today!