Your pre-tax contributions to the 403(b) program are deferred from current federal income tax, and in many states, state income tax. Any investment earnings accumulate tax-deferred until paid or distributed. All taxable distributions are subject to ordinary income taxes, and are not afforded the reduced tax rate currently applicable to capital gains and dividends on after-tax savings. Distributions before age 59½ may incur an additional 10 percent penalty tax.*
Since contributions to a retirement savings plan may be made with pre-tax dollars, you can reduce your taxable income each year.
The chart above assumes a biweekly pay period. The 25% tax rate used in this chart is a hypothetical tax rate as it might apply to one's marginal taxable income after taking into consideration all taxes owed in a given year.
The aggregate annual elective deferral limit for 2014 is $17,500 per individual and includes contributions to your 403(b) annuities (even if held under different employers), 401(k) plans, SIMPLE IRA plans, and SARSEP plans. Amounts contributed in excess of noted limits may be subject to additional taxes and penalties that may affect both your and your sponsor/employer.
Your employer's plan may permit one or both of the following catch-up provisions:
Years of service catch-up - This catch-up is available through certain employers, such as school districts and not-for-profit hospitals and other entities. Employees with 15 years of service may be able to contribute an additional $3,000 per year, but you should consult with your own independent tax advisor to determine how much of this catch-up is available for you. Some, or all, of the limit may have been exhausted through previous contributions.
Age-50 catch-up - This catch-up is available for any participant who has attained age 50 or more by December 31st of the contribution year.
The following summarizes the maximum annual contribution limits:
|Years of Service
|Age 50 or Over
Note: Your contributions generally may not exceed 100% of your compensation. Catch-up contributions must be applied first to the years-of-service catch-up limits (for employees with 15 years of service) before being applied to the age-50 catch-up.
* A Roth account option may also be available under your Employer's plans. Roth contributions are made with after tax amounts, but, subject to certain requirements, not taxed when distributed
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