What is a 403b catch-up contribution?

If you are an employee of a public school institution, religious organization, or other non-profit entity, you may be covered under a 403(b) plan. A 403(b) plan is a tax-deferred retirement plan that lets employees defer part of their salary for their retirement. If you are above 50, you become eligible to make additional contributions beyond the standard contributions.

A catch-up contribution is an additional contribution you can make to your 403(b) plan beyond the regular contribution limit. This contribution is reserved for employees aged 50 or older. Once you reach 50, you become eligible to contribute an additional $6,500 in catch-up contributions to your 403(b), for a total of $27,000 in 2022. Since you contribute pre-tax dollars to a 403(b), you will only owe taxes when you make a withdrawal from the account.

403(b) basics

A 403(b) plan is designed for employees of public schools, hospitals, and other tax-exempt organizations. Examples of 403(b) participants may include teachers, professors, school administrators, nurses, and librarians. Similar to a 401(k), 403(b) participants make plan contributions through payroll deductions.

There are two types of 403(b) plans i.e. traditional 403(b) and Roth 403(b) plans. A traditional 403(b) allows employees to make pre-tax contributions to the retirement account, and only owe taxes when they withdraw money from the account. On the other hand, a Roth 403(b) is funded with post-tax dollars, and there is no immediate tax benefit. However, employees will not owe taxes when they withdraw money from the Roth 403(b) plan.

403(b) catch-up contribution limit 

In 2022, you can contribute up to $20,500 to a 403(b) plan. If you are 50 or older, you can contribute an additional $6,500 catch-up contribution, for a total of $27,000. However, to be eligible to make catch-up contributions, you must first exhaust the standard contribution limit.

403(b) plans allow employers to match employees’ contributions up to a certain limit. For 2022, the combined employer and employee contributions cannot exceed $61,000, or $67,500 for those 50 or older.

How the 403(b) 15-year catch-up contribution works

If you have worked for your current employer for 15 years or more, and your annual contributions were less than $5,000 per year, you may be eligible for a special catch-up contribution known as the 15-year catch-up.

Under this provision, you can contribute an additional $3,000 per year in additional contributions, up to a $15,000 lifetime limit. You don’t have to be 50 or older to qualify for the special catch-up contribution; as long as you have 15 or more years with your employer, you will be eligible to make the catch-up contribution to a 403(b) plan. If you are above 50, you can make both contributions to your 403(b) in the same year.

How to make 403(b) catch-up contribution

403(b) participants who are age 50 or older during a given year can make catch-up contributions. You become eligible to make catch-up contributions at any time during the year in which you turn 50.

Start by contacting your 403(b) plan administrator to confirm that you are eligible to make catch-up contributions. You will likely require authorization from your plan administrator to make a catch-up contribution.

403(b) catch-up contributions must be made before the end of the year. If you are contributing a percentage of your income each month, you should make sure the percentage contribution is enough to meet the new annual contribution limit, including the catch-up contribution.

If you decide to contribute to a 403(b) plan every pay period, you will need to contribute $1,125 bi-weekly, or $2,250 every month. The annual contributions should total up to $27,000. If you prefer quarterly payments, you would need to contribute $6,750 every quarter.

Do 403(b) catch-up contributions make sense?

If you are 50 or older and in your peak earning years, it might make sense to save extra money for your retirement. Taking advantage of the additional contributions can help you save more as you approach your retirement years.

Here are situations when it makes sense to make catch-up contributions:

You want to save more

If you have additional income in your 50s or 60s, making catch-up contributions can help you accelerate your retirement savings. These funds will grow tax-deferred, and you will only pay taxes when you withdraw money in retirement. On the other hand, if you have accumulated a nice nest egg, taking advantage of catch-up contributions can boost your retirement savings to help you retire earlier.

You’ve maxed out

If you have hit the maximum contribution limit for 403(b) and you are 50 or older, you can use catch-up contributions to accelerate your retirement savings. You can also open another retirement vehicle to channel additional funds. If you are already retired, you can roll over your 403(b) to Beagle to enjoy a wider pool of investment options and get access to a plan loan at 0% net interest. 

Tax benefit of a 403(b) catch-up contribution

Many workers reach peak earnings in their 50s, and this means that they can save more money and cut taxes. Since a 403(b) is funded with pre-tax money, any contributions made to the retirement plan are deducted from the gross income before taxes.

For example, an employee who is above 50 and is in the 35% tax bracket saves $9,450 on the annual income taxes by maxing out 403(b) contributions up to $27,000 in 2022. 

Similarly, an employee who is 50 or older, and falls in the 22% tax bracket can save $5,940 by contributing the full $27,000 in 2022. This represents $1,430 more tax savings than workers who are below age 50.