403b Plan Contribution Limits

Setting money aside for retirement is one of the largest financial commitments that you can make in life. To a secure a comfortable retirement, you may need to amass several hundreds of thousands, if not, millions of dollars in resources before leaving the workforce. As an educator or non-profit employee, you will put money into a 403b plan to meet your retirement ends. To do so, you must become familiar with the 403b structure and its complicated contribution limits.

403b Plan Contribution Limits: Identification

403b plans allow for pre-tax, or tax-deductible contributions. Once the money is put into your account, you can purchase mutual funds that will grow on a tax-deferred basis. Tax-deferral means that you will not owe taxes on interest income, dividend payments, or capital gains as they occur within the account. After age 59 ½, you can withdraw 403b funds without penalty. At that point, your 403b distributions will be taxed as ordinary income.

403b Plan Contribution Limits: Base Contribution Limits

403b plan contributions are classified as either employer contributions or employee elective deferrals. For the 2010 and 2011 tax years, you are limited to $49,000 or 100 percent of your compensation in total 403b contributions from your employer match and out of your paycheck. For employee elective deferrals out of your paycheck, you are limited to $16,500 in 403b contributions for the tax year.

403b Plan Contribution Limits: 15-Year Service Rule

The 15-year service rule allows for higher 403b employee elective deferrals, if you have put in at least 15 years of work within a church, welfare service agency, health service company, hospital, or public school system. The IRS says that your elective deferral limit is increased by the lesser of $3,000, $15,000 minus the amount of 15-year elective deferrals made in prior years, or $5,000 times the number of years of service with the organization minus total elective deferrals made in earlier years. At maximum, you will be able to contribute $19,500 in elective deferrals due to the 15-year service rule.

403b Plan Contribution Limits: Catch-up Contributions

403b plan catch-up contributions are applicable - if you are at least 50 years old by the end of the tax year. The IRS permits $5,500 worth of catch-up employee elective contributions. You may therefore qualify for a total of $54,500 worth of 403b contributions if you are 50 years old and older, and meet the 15-year service rule. This $54,400 would be broken down into the $19,500 worth of elective deferrals under the 15-year service rule, plus $29,500 in employer contributions that bring you to the $49,000 limit. On top of the $49,000, you can make $5,500 in catch-up contributions - for a grand total of $54,500.

403b Plan Contribution Limits, Sources:

IRS: Retirement Topics - 403b Plan Contribution Limits

IRS: 403b Plan Basics

More From Kofi Bofah and Yahoo! Contributor Network:

CD Structure and Laddering

How to Pay Off Credit Card Debt Fast

Buying Stocks: Dividend Reinvestment Plans (DRIPs)