403b Contribution Fundamentals
In order to begin making your 403b contributions, you first need to be employed as a teacher in a public or private school. A 403b plan is known as a “tax sheltered annuity” or TSA, because you’re able to make contributions to your 403b with pre-tax dollars. Because your plan contributions fund your account with pre-tax money, the IRS doesn’t tax the benefits until you begin making withdrawals from your account. Also, your employer can contribute to your account with pre-tax dollars in the form of a match to your contribution. Both the contributions and the growth of your portfolio grow tax-deferred. Here are some important things you need to know about your 403b contributions.
Four Ways Teachers can Contribute to a 403b Plan
Unless you’re participating in a 403b plan that offers after-tax contributions, usually only your employer is qualified to contribute to your account. Generally, there are four different types of contributions that can be made to your 403b account, and they are as follows:
- Elective Deferrals – Agreement that allows your employer to withhold a portion of your compensation and contribute that amount toward your 403b account.
- Nonelective Contributions – These are contributions made by your employer as matching and discretionary contributions to your 403b account.
- After-Tax Contributions – Similar to a Roth IRA, these types of contributions to your 403b account would be made with after tax dollars.
- Combination – A combination of any the previously mentioned contribution options.
Benefits for Teachers Contributing to a 403b
The funds in your portfolio can grow tax free until you begin withdraws at age 59 ½ or upon retirement at an age beyond that. Similar to other qualified retirement savings plans, you can gain increased funding with an employer match for every dollar that you allocate toward building your nest egg (usually with a maximum limit). There are also retirement savings tax credits you can claim on your tax return, which may also reduce your tax burden. Finally, most 403b plans offered by non-profit organizations offer you the opportunity to become “vested” after a certain time period. Becoming vested means that after a period of service time has elapsed, you get to fully retain a percentage of the employer contributions to your account.
Limits on Teacher 403b Contributions
For the 2019 tax year, the IRS recently increased the annual 403b contribution amount from $18,500 to $19,000. This means that regardless of your income level, as a teacher you will be permitted to allocate no more than $19,000 toward your 403b retirement savings plan during the 2019 calendar year. If you are financially able to do so, I would also recommend funding a Roth IRA, which is limited to $6,000 annually.
What are Catch-Up Contributions?
Are you age 50, or older? With an IRS qualified retirement savings plan, you’re permitted to contribute an additional $6,000 in 2019 to your 403b plan. The catch-up contribution provides an incentive to maximize your retirement fund as you get closer to retirement age; however it’s only allowed to be contributed after you have reached the regular maximum contribution of $19,000. Also, it’s important to note that if your employer is providing a match contribution, the total catch-up funding would still be limited to the $6,000 within the teaching calendar year. For example, if your employer offers a dollar for dollar match, and you agree to an elective deferral of $3,000 of compensation, your teacher 403b fund would reach the maximum catch-up contribution of $6,000.
Tax Credits Available for Teachers with 403b Contributions
There are a few tax credits you can take advantage of if you are a teacher with a 403b plan. If you happen to have a disability, and you designate yourself as the beneficiary with “Achieving a Better Life Experience” (ABLE) account contributions, you will be permitted to claim the amount of contributions made on your tax return. The ABLE contributions tax credit was created for people with disabilities. Also, you can claim retirement savings and contributions credit (otherwise known as “savers credit”) on your tax return if your adjusted gross income is $63,000 or less and you’re married filing jointly; if you’re single, the adjusted gross income limit would need to be $31,500 or less.
Final Thoughts on Teacher 403b Contributions
Participating in a 403b plan is like being a member of an exclusive investment club. While other plans offer a similar opportunity to invest in a retirement savings plan with pre-tax dollars, the 403b is the “tax sheltered annuity” plan that grants you access to exceptional opportunities to build a healthy nest egg in preparation for retirement.
Michael Garvin is a Financial Advisor with 10 years of experience in retirement planning and investment management. Michael holds insurance Licenses for all personal & commercial insurance lines including life, disability and health.
Related references:
https://www.irs.gov/publications/p571
https://www.investopedia.com/university/retirementplans/403b/403b2.asp
https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-403b-tax-sheltered-annuity-plan
