Contributions Types for 403(b), 457 Retirement Plans

What types of contributions can you make to 403(b) or 457 Retirement plans?

As always, the official plan document is the governing document for your employer’s sponsored retirement plan. Depending on your employer’s plan document, you may make a few different types of contributions to your 403(b) or 457 retirement account.

The most commonly offered, is a pre-tax elective deferral.

• These are employee contributions that are notated using a salary reduction agreement form. This agreement is a contract, typically a one-page document between you, your TPA and your employer to withhold the funds from your monthly salary and deposit them into your 403(b) or 457 retirement account. Pre-tax contributions are exactly that – funds are not taxed until they are withdrawn. Pre-tax contributions may put you in a lower tax bracket, reducing your overall tax rate.

The second most common are Roth contributions, also known as after-tax.

• When you hear Roth 403(b) or Roth 457, these are after tax contributions. These are exactly what they sound like, post tax. These employee contributions are reported as compensation in the year in which you contribute them and are included in your gross income for income tax purposes. Roth contributions are taxed when they are taken out of your payroll; though, contributions and earnings grow tax-free until they are withdrawn.

Each year, the IRS distinguishes the maximum allowable contribution amounts (MAC) for the 403(b) and 457 retirement accounts. If your employer’s plan allows for both pre-tax and Roth contributions, these limits are combined within the 403(b) and 457. Let me provide an example. If you contribute to a pre-tax 403(b) and a Roth 403(b), your MAC is one amount ($19,500 for 2020). If you contribute to a pre-tax 457 and a Roth 457, your MAC is one amount ($19,500 for 2020). Now, if you have both a 403(b) and a 457, your MAC limit is combined. Meaning, your MAC for the 403(b) and your MAC for the 457 is totaled together ($39,000 for 2020).

All employee elected deferrals, both pre-tax and Roth (403b and 457), must use the designated salary reduction agreement (SRA) form to start, change or cancel the contributions.

Finally, if your employer’s plan document allows, your employer may contribute employer contributions.

• These types of contributions can include matching contributions, discretionary contributions and certain mandatory contributions made by your employer. These contributions are not typically made using a salary reduction agreement, as the employer initiates these contributions and the contributions can fluctuate. The employee may pay income tax on these contributions when they are withdrawn from their retirement account. An employer is not required to contribute employer contributions for their employees.

Now keep in mind, that the annual limit on all contributions, including any employee and employer contributions for both a 401k and a 403(b) plan, are combined ($57,000 for 2020). This is also known as the 415c defined contribution limit. Please read more on this 415c defined contribution limit here.

These limits are separate from any IRA accounts that you may have. Please seek your trusted financial advisor for more information. You may also contact NBS at 1(800) 274-0503 option 5 or at 403bsupport@nbsbenefits.com.

For a listing of all current year 2020 maximum allowable contribution limits and what you may qualify for, please click here.

For more information regarding the different types of contributions to a 403(b) and or a 457 Retirement plan, please check out www.irs.gov.