403(b) Plan Contribution Limits in 2016

Retirement Plan Limits for Teachers and Non-Profit Employees

403(b) plans for non-profit workers. Caiaimage/Robert Daly/Getty Images

When it comes to examining all of the account options available for retirement, 401(k) plans tend to get the most attention. But if you work at a school, hospital, library, research facility, church, or another organization qualified under IRS Section 501(c)(3) you are likely familiar with 403(b) plans.  A 403(b), sometimes referred to as a tax-sheltered annuity plan or TSA, is a retirement plan for employees of public schools and certain non-profit organizations.

Here is how much you can contribute to your 403(b) plan in 2016:

403(b) Contribution Limits for 2016

These amounts may change from year to year but will remain the same as the 2015 contribution limits.  For 2016, the maximum amount you can contribute to a 403(b) plan is $18,000 ($24,000 if age 50 or older) or 100% of compensation.

In addition to the employee contribution limits more money can be set aside into a 403(b) if an employer offers match contributions.  For plans that provide an employer match, the total contribution limit is $53,000. The employee contribution limit remains the same as above, but the employer may choose to add up to another $35,000 (not to exceed the maximum of $53,000 in 2016).

What are the main benefits of contributing to a 403(b)?

403(b) plans are very similar to 401(k) plans. But this wasn’t always the case (see the current differences explained below).  403(b) plans used to primarily be invested in annuity contracts with a separate account for fixed or variable rate of return investments.

Now the majority of 403(b) plans offer mutual fund investment options within custodial accounts. While some 403(b) plans still offer annuity investments, the use of a diversified investment lineup of mutual funds is very similar to the structure of traditional 401(k) plans.

The most common benefit of 403(b) plans is that contributions are made through pre-tax salary deferrals.

If you work for a company that offers a 403(b), participation in your employer’s plan can help you accomplish the following on the path to retirement:

  • Automatically build wealth for retirement
  • Pre-tax contributions lower your taxable income
  • Investing each pay period takes advantage of dollar cost averaging
  • Earnings grow tax-deferred and are not taxed until you withdraw them
  • Employer matching contributions may be available

2016 Limits for Roth 403(b)s

The designated Roth account (DRA) program allows organizations to designate 403b plan contributions as Roth contributions. Roth 403(b) plans are very similar to Roth 401(k)s. This option is relatively new and the primary benefit is that you can make after-tax contributions that allow for tax-free growth of your investments.

For 2016, the annual contribution limit for Roth 403(b)s is $18,000, plus an additional $6,000 catch-up contribution for those age 50 or older.

  • Contributions are made with after-tax dollars (no current-year tax deduction)
  • Earnings grow tax-free as long (as you are at least 59 ½ years old and it has been five years since your first Roth 403(b) contribution)
  • Unlike Roth IRAs, there are no income restrictions
  • Provides tax diversification

If your plan offers a Roth 403(b) option you may contribute to a traditional, pre-tax 403(b) and a Roth 403(b) in the same year as long as the combined contribution amount does not exceed the annual limit.

Differences between a 403(b) and a 401(k)

Previous differences between these different types of retirement plans were eliminated with the Economic Growth and Tax Relief Reconciliation Act of 2001. However, one special election that is referred to as the 15-year rule is still in effect for 403(b) plans (if permitted by the employer).  This special lifetime catch-up provision allows employees with 15 or more years of service with the same employer to contribute an additional $3,000 if the average contributions in previous years did not exceed $5,000.

Under current rules this catch-up provision cannot exceed $3,000 per year (up to a lifetime maximum of $15,000). If both the age 50 and the 15-year catch-up provisions are available, any contributions that exceed the $18,000 annual limit will first be applied using the 15-year rule followed by the age 50 catch-up.