Generally, 403(b) contributions are tax-deductible up to an annual limit set by the IRS each year. You may be allowed to deduct additional “catch up” amounts depending on your age and how long you have been with your current employer.
There are some exceptions to deductibility though, such as in the case of contributions to a Roth 403(b), which are not deductible. In this article I’ll give you a simple overview of 403(b) deductibility.
403(b) Annual Contribution Limit
For 2021 the standard annual 403(b) limit on tax-deductible contributions is $19,500. You can have up to $19,500 withheld from your paycheck and deducted from your current taxable income.
403(b) Catch Up Contributions
You can deduct an additional $6,500 catch up contribution if you are at least 50 years old.
In addition to the regular catch up catch up contribution for being 50 or older, there is an additional catch up contribution opportunity unique to 403(b) plans. If you have at least 15 years of service with your current employer you may be able to make, and deduct, another $3,000 contribution each year. This additional catch up is limited to $15,000 over your lifetime.
If you qualify for both catch up contributions then the first $3,000 you contribute above the standard limit will apply to the $15,000 lifetime limit. In other words, you can’t just make the age 50 catch up contribution and “save” the $15,000 lifetime limit for later.
What About Roth 403(b) Contributions?
Roth 403(b) contributions are not tax-deductible. The tradeoff is that you can withdraw from a Roth 403(b) without paying taxes on the distribution.
You may also be able, if your plan permits, to make non-deductible, or after-tax contributions. Don’t confuse after-tax with Roth, even though at first blush they sound the same. Non-deductible contributions are, wait for it… not deductible. So why make them? You can make after-tax contributions ABOVE the annual deferral limit (currently $19,500). This allows you to save even more in your 403(b).
The difference between Roth and after-tax contributions is that you can withdraw the growth on Roth contributions tax-free. The growth on after-tax contributions is taxable. If you are making or considering making after-tax contributions make sure you consider rolling those out to a Roth IRA if your plan rules allow it. This provides a way to avoid building up taxable gains from your after-tax contributions. This is called a mega backdoor Roth strategy.
The total amount of contributions between your own deductible contributions, employer match, and after-tax contributions cannot exceed the “annual additions limit”.
If you are planning your 403(b) contributions it’s helpful to get an idea of how much your account may grow to over time, and see how much you will be able to withdraw in retirement. I’ve got a 403(b) calculator here that makes it easy.