Financial Planning

403(b) Contribution Limits for 2021

Teachers and nonprofit workers can contribute the same amount to a 403(b) retirement plan in 2021 as they could last year.

Certain employees of schools and other tax-exempt organizations can participate in a 403(b) retirement plan. This includes teachers, professors, school administrators and hospital workers.

The maximum amount an employee can elect to contribute to a 403(b) retirement plan for 2021 is $19,500. If you're 50 or older, you can contribute an additional $6,500 as a "catch-up" contribution, bringing your contribution total to $26,000. These amounts remain the same from 2020.

As with a traditional 401(k) account, money going into a 403(b) through payroll deductions hasn't yet been taxed. The contributions and earnings grow tax-free until you withdraw them—usually in retirement. You can pull money out of the account without a 10% penalty if you're at least 59 1/2 (or 55 if you've left the job). Withdrawals are subject to regular income tax.

"It's a vehicle meant for saving for retirement and to cover pension shortfalls," says Daniel Otter, founder of 403bwise.org, an education and advocacy website about 403(b) plans.

15-Year Catch-up Contributions and Employer Contributions to 403(b)s

For 2021, the combined employee and employer contribution limit for a 403(b) is $58,000 for workers under age 50, an increase of $1,000 from the previous year. The limit for those 50 and older is $64,500. That means an employer can contribute up to $38,500 to a worker’s account if the worker has maxed out his or her contribution. 

Otter says this is a perk generally offered to employees at public colleges but very few public K-12 school systems offer any type of 403(b) match to workers.

Some employers also permit both younger and older workers to make catch-up contributions under the so-called 15-year service rule. Under this provision, if you have 15 or more years of service at the same employer, you can contribute an additional $3,000 a year if you have not maxed out your 403(b) contributions in previous years, Otter says. For example, a 45-year old teacher with 15 years on the job could contribute as much as $22,500 in 2021 ($19,500 for the annual contribution plus the $3,000 catch-up contribution). The 15-year service catch-up contribution, however, has a $15,000 lifetime limit.

Again, most K-12 school districts simply don't offer this 15-year service rule, says Scott Dauenhauer, a certified financial planner and owner of Meridian Wealth Management.

Best Investments in 403(b)s

Often, 403(b) plans are filled with high-cost annuities and other insurance products. A 2016 report by benefits consultant Aon Hewitt found that participants in 403(b) plans lost a total of nearly $10 billion annually to excessive fees.

"Most public K-12 403(b) plans are filled with products that are sold by sales agents," says Otter. "Teachers don't know who to talk to. They need to get self-educated and understand the fees."

Review your investment options to find the best insurance company or mutual fund provider within your plan to meet your needs. The website 403bcompare.com, which provides information on California 403(b) plans, lists fees, investment options and performance information for plans offered in the state's local school districts. Even if you don't work in California, the site is a valuable comparison tool because many of the investment companies listed offer similar 403(b) plans in other states.

You can also switch investments and financial firms within your plan. First, stop making contributions. Why? Because each contribution potentially has its own surrender charge, which is a fee you'll pay if you sell the investment within several years. By stopping contributions, you reduce the amount you'll pay in surrender charges. Next, take time to figure out the costs and benefits of switching investments, Otter says.

Need help? Get a list of your available investment options and post it on 403bwise.org for feedback. Current and former teachers are on the discussion boards to provide assistance. If you notice any of the big names, such as Fidelity or Vanguard, look into what they have to offer, and keep in mind any surrender charges you may have to pay. It may make more sense to place any new contributions with a new provider and wait to switch the older investment once the surrender charges are less.

Finally, talk to your plan administrator to find out when you can switch. Some plans are liberal and allow employees to switch anytime, whereas others permit changes only once or twice a year.

As an alternative to a 403(b), consider opening a Roth IRA with automatic contributions. You can contribute up to $6,000 a year to a Roth IRA, plus another $1,000 if you're 50 or older. You can withdraw your contributions at any time without penalty or taxes. You must be at least 59 1/2 and have owned the Roth for at least five years to withdraw earnings free of penalty and taxes.

Most Popular

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?
retirement

Are You Still Chasing the Almighty Dollar, Even Though You Have Plenty to Retire?

In our experience, many have saved enough money to retire comfortably. Yet too many worry about their money running out and want more. Maybe it’s tim…
May 6, 2021
Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs
Coronavirus and Your Money

Child Tax Credit 2021: Who Gets $3,600? Will I Get Monthly Payments? And Other FAQs

People have lots of questions about the new $3,000 or $3,600 child tax credit and the advance payments that the IRS will send to most families in 2021…
May 4, 2021
20 Dividend Stocks to Fund 20 Years of Retirement
dividend stocks

20 Dividend Stocks to Fund 20 Years of Retirement

Each of these high-quality dividend stocks yields roughly 4%, and you can expect them to grow their payouts even more. That's a powerful 1-2 combo for…
May 7, 2021

Recommended

7 Money-Smart Ways to Spend Your Tax Refund
Tax Breaks

7 Money-Smart Ways to Spend Your Tax Refund

Since this year's tax deadline was pushed back to May 17, many people are just now filing their tax return. That means there are a lot of tax refunds …
May 8, 2021
33 States with No Estate Taxes or Inheritance Taxes
retirement

33 States with No Estate Taxes or Inheritance Taxes

Even with the federal exemption from death taxes raised, retirees should pay more attention to estate taxes and inheritance taxes levied by states.
May 6, 2021
Saver's Credit: A Retirement Tax Break for the Middle Class
Tax Breaks

Saver's Credit: A Retirement Tax Break for the Middle Class

Your retirement contributions could be the key to a lower tax bill.
May 3, 2021
The Benefits of Working Longer
Empty Nesters

The Benefits of Working Longer

Delaying retirement for a couple of years—or even a few months—is the most effective way to improve your retirement security.
April 29, 2021