403b Maximum Allowable Contributions

In a previous post, I had talked about what the basics of a  403(b) Tax Sheltered Annuity. As a recap, a 403(b) is a type of retirement account that’s only offered to a certain type of employees. To these types of employees, it is the equivalent of their 401(k). What makes 403(b)’s unique is that they have a component that’s called the maximum allowable contribution. If you qualify, it may be something you should look into.

Maximum Allowable Contribution

Generally, in a 403(b), you have the same contribution limit as you would in a 401(k). For 2008, you’re allowed to put in $15,500. If you are over the age of 50, you then also are also granted the additional catch up contribution of $5,000 for a total contribution of $20,500. But a unique thing in the 403(b) that is specific only to the 403(b) is that if you have at least 15 years of service with either the public school system, the hospital, a home health service agency, a church or any other type of church association, then the limit on your deferral into your 403(b) can be increased by the least of $3,000 or $15,000 reduced by the sum of:

  • The increases to the general limit you were allowed in earlier years because of this rule, plus the aggregate amount of designated Roth contributions for prior tax years.
  • Or $5,000 times the number of your years of service for your organization, minus the total elective deferrals made by your employer on your behalf for those years.

15 Year Rule Simply Put

While that is a mouthful, in simpler terms, if you qualify for the 15-year rule, your elected deferrals under this limit can be as high as 18,500 for 2008, plus if you’re over the age of 50, you’re allowed the $5,000 catch up for a total of 23,500.

To determine whether you are eligible, you must first calculate based on certain IRS tables to see if you have the years of service and also determine if you had any prior contributions that would affect how much you can put in. Your tax preparer should aid you in filling out the IRS forms and then should file then in your records for safekeeping.  While some computations are involved, it could be a nifty way of deferring more for a secure retirement.

References: IRS Publication 571

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