The upcoming contribution limits for 403(b) retirement plans in the years 2024 and 2025 are under discussion.
The upcoming contribution limits for 403(b) retirement plans in the years 2024 and 2025 are under discussion.
Most employees have encountered 401(k) plans and their utility in funding retirement, but certain staff members in education, medical professions, or non-profit organizations can benefit from alternative tax-favored retirement savings options. These fortunate individuals often have access to 403(b) plans, provided by many employers in the aforementioned sectors.
403(b) contribution limits
403(b) plans share numerous similarities with 401(k)s, and one of their shared traits is the opportunity to make substantial retirement contributions.
For the fiscal year 2024, employees can contribute up to $23,000 to a 403(b) plan, with this limit increasing to $23,500 in 2025. Those aged 50 or above can avail of a catch-up contribution of $7,500 in both 2024 and 2025, elevating the total eligible contribution limit to $30,500 in 2024 and $31,000 in 2025.
From 2025 onwards, workers aged between 60 and 63 can take advantage of additional catch-up contributions under the revised Secure Act 2.0 regulations. This benefit amounts to $3,750, resulting in a maximum 403(b) contribution of $34,250 for these individuals in 2025.
Some employers incorporate an additional catch-up contribution option within their plans, permitting employees with 15 years or more of service with the organization to contribute an additional $3,000 in each of 2024 and 2025, with a lifetime cap of $15,000.
Let's delve deeper into 403(b) plans to uncover how employees can take full advantage of them.
403(b) basics
403(b) plans derive their name from Section 403(b) of the Internal Revenue Code, which lays out the tax incentives they offer, as well as the constraints on these plans. 403(b) plans cater to public schools and tax-exempt charitable organizations, meaning a majority of those with access to them work in schools, non-profit hospitals and healthcare providers, or charities.
403(b) plans permit employers to contribute funds alongside employee contributions. Employer contributions in the form of discretionary or matching contributions are permissible, with a combined total maximum contribution of $69,000 in 2024 for younger employees, rising to $81,250 for those aged 60 to 63 in 2025.
However, employer contributions tend to be less frequent and as generous as in the 401(k) realm, primarily due to the non-profit nature of these businesses.
One aspect to be mindful of is the range of investment options available in your 403(b) plan. Initially, employers were required to utilize annuity products from insurance companies to secure the tax advantages of 403(b)s. Although these restrictions were subsequently relaxed to accommodate traditional mutual funds and similar investments, some plans may still offer higher-cost annuities that may not be suitable for every investor's needs.
Roth or regular?
The high contribution limits of 403(b) plans make them highly advantageous. As with 401(k)s, these plans can be either traditional or Roth 403(b), giving employers the opportunity to offer both to their employees.
Traditional 403(b)s involve saving pre-tax income and watching it grow tax-deferred within the account. For example, if your total income from work amounts to $50,000, and you contribute $5,000 to your 403(b), your gross income will be reduced by $5,000 to $45,000. Afterward, you won't have to pay income tax on the investment income generated by your 403(b) account. Only when withdrawals are made in retirement will taxes be levied on the funds withdrawn.
Roth 403(b)s involve saving post-tax income and witnessing it grow tax-free inside the account. As long as the necessary conditions are met, you'll never pay taxes again on Roth 403(b) funds, even when withdrawals are made in retirement.
Maximizing your savings
If possible, saving in a 403(b) plan is often advisable, especially if your goal is to amass as much savings as possible. Other alternatives, such as IRAs, have more limited contribution limits: $7,000 in 2024 and 2025, with a $1,000 catch-up contribution in both years for those aged 50 or above.
403(b) plans may not be as popular as their 401(k) counterparts, but they play a significant role in ensuring a secure and successful retirement planning strategy. If your employer offers a high-quality plan with diverse investment choices, a 403(b) could be the key to achieving your retirement objectives.
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In the realm of retirement savings, 403(b) plans can provide substantial opportunities for contributions, with a limit of $23,000 in 2024, increasing to $23,500 in 2025 for employees. Moreover, those aged 50 or above can make additional catch-up contributions, amounting to $7,500 each year, leading to a total eligible contribution limit of $30,500 in 2024 and $31,000 in 2025.
When considering retirement planning, it's essential to weigh the benefits of various savings options, such as IRAs, which have more limited contribution limits compared to 403(b) plans. With a maximum contribution of $7,000 in 2024 and 2025, and a $1,000 catch-up contribution for those aged 50 or above, IRAs might not be as suitable for maximizing retirement savings, particularly for individuals aiming for substantial financial security in their golden years.