A 403(b) retirement plan is a thrift savings plan or tax-sheltered annuity plan offered by some charities and most public school districts. It is similar to a 401(k) plan in terms of how an employee contributes and an employer matches, as well as how an employee can elect to deduct money directly from their paycheck and redirect it into their plan.
The most a taxpayer can contribute as an elective deferral to a 403(b) plan in tax year 2021 is $19,500. If you are age 50 or older, you can contribute an additional $6,500 in 2021 as a "catch-up" contribution. Employers can match an employee's contribution for the year. These amounts are the same as in 2020.
The total of elective deferrals and matching contributions is limited to $58,000 for the 2021 tax year—up from $57,000 in 2020. These limits are indexed for inflation, which means they can be expected to increase periodically to keep up with the economy.
Historical Limit Increases
This chart can help put it all in historical perspective. You'll see that limits have not increased significantly since 2009, but they've crept up incrementally to match inflation and the economy—at least to some extent.
|403(b) Contribution Limits by Year|
|Year||Elective Salary Deferral Limit||Catch-up Contributions if Age 50 or Older||Total Possible Employee Contribution Limit||Limit on All Sources||Source|
|2021||$19,500||$6,500||$26,000||$58,000||2021 Limitations and Income Ranges|
The elective salary deferral limit remains unchanged at $19,500 for 2021. The catch-up limit for employees over 50 also remains unchanged at $6,500 in 2021. Therefore, the total maximum contribution for employees at least 50 years old remains $26,000.
Limits Apply to Two Plans
These limits apply to any 403(b) and 401(k) accounts a taxpayer might have during the year. In other words, if you have two or more jobs or switch jobs in the middle of the year, you may have to devote some time to tracking your contributions to your 401(k) and 403(b) plans to make sure that you do not contribute more than the amount allowed. Failure to pay attention to these limits across accounts can result in significant annual penalties.
If you realize you have contributed too much to these kinds of accounts, you have until the tax-filing deadline the following year to correct the mistake by withdrawing the excess amounts. For 2020 tax filings, the deadline is May 17, 2021; typically, however, Tax Day is April 15.
Some Tips for Breaking Down the Limit
It might be easiest to break the annual limit into equal dollar amounts per pay period if you plan to contribute the maximum amount allowed. This will allow you to save the same amount each pay period, and it will dollar-cost-average your contributions into your retirement investments. You can do this by taking your annual contribution amount and dividing that total by the number of pay periods during the year.
Elective deferrals are treated separately from the employer's matching contributions. Each has its own limits and tax treatment. Elective salary deferrals can be placed into a tax-deferred traditional 403(b) or a post-tax Roth 403(b) account, or a combination of traditional and Roth accounts as long as the total of all salary deferrals equals less than the annual maximum.
Matching funds are always contributed to the tax-deferred portion of your 403(b) plan. The total of your elective salary deferral plus employer matching contributions is limited to $58,000 for 2021. This amount increased $1,000 from the $57,000 limit that applied in 2020.