The maximum 403(b) contribution limit in 2017 is $18,000, or $24,000 if you're aged 50 or older. That's unchanged from the 2016 limits for this retirement plan. It also precisely mirrors the 401(k) contribution limits for 2017. Let's talk briefly about the benefits and drawbacks of 403(b) plans versus other retirement plans, and how you can get up to the cap.
403(b) vs. 401(k)
403(b) plans are broadly similar to their more common cousin, the 401(k) plan. (If you have access to one, you usually don't have access to the other; 401(k)s are used throughout the private sector, whereas 403(b) plans are usually offered to teachers, nonprofit workers, and ministers.) Both come with Roth and traditional options, with differing tax implications, though not every employer will offer both varieties. But the fact remains that 403(b) plans, whether Roth or traditional, confer a significant tax advantage compared to regular brokerage accounts.
Another big plus of 403(b)s is the opportunity for automatic deferrals, which direct a portion of your earnings straight into the account. Automating your savings means you'll save more: Instead of making the effort to put money aside each month, you have to make an effort not to put money aside (by changing your deferrals). Plus, since the money is taken out before you see it, it can steadily grow out of sight and out of mind.
On the minus side, many 403(b) plans are behind 401(k) plans in their use of some best practices to enhance employee savings. While this isn't a structural drawback to the concept of the 403(b), it does highlight some of the increased difficulties savers may face with a 403(b) plan. For example, a study conducted earlier this year noted that only 19% of 403(b) plans offered auto-enrollment last year. By contrast, Towers Watson found in 2014 that 68% of companies with 401(k)s offered auto-enrollment. The beauty of auto-enrollment is that it gets workers saving immediately, and they have to opt out if they don't want to save that minimum amount. Automatic enrollment has done wonders for 401(k) participation and savings rates. Many 403(b) plans have been historically weighted heavily toward annuities as opposed to mutual funds, which have their own series of pros and cons. Much depends on your particular plan's design.
How to get your maximum 403(b) contribution
If you're looking to sock away the whole $18,000 next year, then start planning now. Because even when you spread it out over many paychecks, it's a big chunk of money. The key will be keeping a good budget (and saving money in innovative ways).
How much you need to defer with each paycheck depends on how often you get paid. I've made a quick chart breaking it down for different pay periods. And how much it takes to "max out" your 403(b) depends on whether you're over 50 and can put away the extra $6,000 annually, too.
|How Often You Get Paid||Under 50? Here's How Much to Contribute||Aged 50-Plus? Here's How Much to Contribute|
|Every two weeks||
|Twice a month||$750||$1,000|
|Once a month||$1,500||$2,000|
Maximize your retirement plan
Compounding is a beautiful thing that can help you get your savings working for you. Particularly if you have decades left between now and retirement, the amount of money you can generate off your savings is impressive. Let's say you're able to contribute $18,000 per year in your 403(b) for 30 years and you earn an 8% annual return from your funds (which is doable if you can match historical stock market returns). You'd retire with about $3.1 million, of which only $630,000 would be actual money you contributed -- the rest would be money you made in the market!
OK, that's probably not realistic for most readers. But let's say you're able to power save for five years at the $18,000 limit, and then you reduce to $6,000 annually for the remaining 30 (still earning an 8% annual return). You'd still have an impressive $1.7 million -- that's $270,000 in your own savings and over $1.4 million in gains.
All in all, it's worth it to get started now and save as much as you can. And don't forget -- there are tax benefits, too.