This week's answer comes from:

Cathy Pareto

Catherina Pareto is the Marketing Director of Investor Solutions, Inc., a fee-only registered investment advisor with over $85 million in assets. Cathy has a BBA in Finance from Florida International University and is currently enrolled in the College for Financial Planning curriculum in preparation for the Certified Financial Planner (CFP) Certification Examination. She can be reached via email at Cathy@investorsolutions.com or via the www.investorsolutions.com website.

Does the 20% limit on 403(b) contributions still apply?

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Does the 20% limit on 403(b) contributions still apply?

from Art

Q: I have read a great deal about the limits to the amounts that can be contributed to a 403(b) going up over the next decade. I have not read whether these contributions are still limited to 20% of gross income.

Does the 20% limit still apply, or can a person contribute the maximum dollar amount even if that amount does exceed 20% of gross income?

A: (Cathy) Thanks for your question and for visiting MFI!

The Economic Growth and Tax Relief Reconciliation Act of 2001 made significant (positive) changes affecting retirement plans, IRAs and other retirement vehicles. The changes are intended to promote more retirement savings among Americans.

The old law stated that annual 403b contributions could not exceed the lesser of the Code section (415)c defined contribution limit or the "maximum exclusion allowance", a formula based on 20% of the employee's compensation. The Act increased this contribution limit to mirror the contribution limits for defined contribution plans and eliminates the 403b maximum exclusion allowance.

The maximum annual amount of elective deferrals was increased to $11,000 in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005, $15,000 in 2006 and indexed thereafter.

The Act also increased the applicable dollar limits on deferrals to allow "catch up" contributions for participants who have reached age 50 by the end of the plan year and who may no longer make deferrals because of limitations imposed by the Code or the plan. The catch up limits are $1,000 in 2002, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, $5,000 in 2006 and indexed thereafter.

Hope this helps!

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