Understanding Recent Changes to Tax Sheltered Annuities

Article Highlights:

• Key Benefits
• Contribution Limits for 2025
• Elective Deferral Limit
• Catch-up Contributions
• Combined Contribution Limits
• Avoiding Common Pitfalls
• Distribution and Rollover Rules
• Loans and Hardship Distributions
• Special Considerations

Many tax-exempt organizations and public schools give their workers a 403(b) plan, which is also called a tax-sheltered annuity. This is a way for them to save for retirement. These plans let you put money into them before taxes, which may help you save for retirement. These plans provide a lot of tax benefits and make it easier to build up wealth over time by letting you postpone your pay, get employer contributions, or both. Most of the time, contributions are tax-deferred, which means that people don't have to pay taxes on them until they take the money out at retirement. Also, the money you make on these donations may grow tax-free until you take it out.

Key Benefits

• Tax Deferral : A 403(b) plan contribution lowers your taxable income for the year it is made, which lowers your total tax obligation for that year.
• Portability : These plans are flexible enough to accommodate your changing professional path since they may often be rolled over into other qualifying retirement funds, such an IRA or another 403(b).

Elective Deferral Limit

Without taking into account any catch-up contributions, the maximum amount you may choose to defer from your pay into a 403(b) plan for 2025 is $23,500. Cost-of-living adjustments cause this sum to fluctuate on a regular basis.

Catch-up Contributions

You may boost your retirement savings with one of two kinds of catch-up contributions:

• Age-50 Catch-up Contributions : You may contribute more catch-up if you are 50 years of age or older. Due to inflation adjustment, this sum is $6,500 in 2025 and tends to rise in most years. You will be required to pay $11,250 in aged-basis catch-up contributions if you are 60, 61, 62, or 63 by the end of 2025.
• 15-Year-of-Service Additional Contributions : Under certain restrictions, additional contributions may be made by certain employees who have worked for specific eligible employers (like schools, hospitals, and churches) for at least 15 years. This could be as much as $3,000, $15,000 less previously excluded special catchups, or $5,000 multiplied by years of service less previously excluded deferrals.

Combined Contribution Limits

Together with the cap on elective deferrals, annual contributions to all of an employee's retirement accounts, including employer matching, employee contributions, elective deferrals, and discretionary contributions and forfeiture allocations to the accounts, cannot be greater than 100% of the employee's pay or $70,000 for 2025. Additionally, $350,000 is the maximum amount of 2025 salary that may be taken into account for calculating employer and employee contributions.

The cap applies to the total amount of all voluntary deferrals made by the employee for the year to any plans that allow such contributions, not simply the 403(b) plans to which the employee makes them. These plans include:

• Code Sec. 401(k) deferred compensation plans,
• Code Sec. 408(k) SEP IRAs,
• Code Sec. 408(p)(2) SIMPLE Plans, and
• Code Sec. 403(b) annuity plans (TSAs)

However, the general deferral limits do not apply to government plans, or Code Sec. 457 plans.

Each year, these sums are modified to account for inflation. For sums other than 2025, get in touch with this office.

Mandatory Roth Contributions

According to recent law, all catch-up contributions must be labeled as Roth contributions as of January 1, 2026, if the participant's Social Security income for the previous year exceeded $145,000.

Furthermore, if a plan allows participants whose incomes exceed $145,000 to make catch-up contributions as designated Roth contributions, the plan must likewise allow other qualified participants to make catch-up contributions as designated Roth contributions.

Avoiding Common Pitfalls

To get the most out of a 403(b) plan and stay out of trouble, it is important to be aware of frequent administrative and compliance mistakes. The following are a few locations where errors often happen:

• Universal Availability : All eligible workers must have equal access to elective deferrals if your 403(b) plan permits them, with certain employee groups being exempt.
• Exceeding Contribution Limits : Keep in mind the age-50 and 15-year-of-service catchup restrictions, and make sure that contributions don't go above them. Taxes and penalties must be avoided by correcting any excess.
• Proper Deferral Handling : To maintain compliance, employers must deposit your voluntary deferrals as soon as possible within the allotted time constraints.

Distribution and Rollover Rules

A 403(b) plan's distributions typically happen when you retire, turn 59½, or experience other qualifying circumstances like death or disability. A 10% penalty tax may be applied to early distributions unless there are exclusions, such as for eligible loans or difficulties.

Participants have a great deal of freedom in managing their retirement funds since they may roll over qualified payouts to other 403(b) plans, 457(b) plans, or IRAs.

Loans and Hardship Distributions

Participants could encounter circumstances in which they need to access finances. It may be possible to get loans from your 403(b) plan. Under stringent IRS restrictions, hardship payments are also allowed for urgent, significant financial necessities.

Special Considerations

• Post-Employment Contributions : Within certain times, some plans permit employer contributions after employment as well as discretionary deferrals.
• Plan-to-Plan Transfers : Maintaining assets in accordance with financial objectives might be made easier by transferring money across authorized annuity issuers within the same 403(b) plan.

A solid option for retirement savings, 403(b) plans provide substantial tax benefits and flexibility. In order to maximize these advantages, members must stay informed and take proactive measures in light of the 2025 contribution limit revisions. You may maintain your retirement preparation by adhering to contribution restrictions, comprehending the nuances of your plan's features, and being aware of compliance obligations.

Please get in touch with our office for further information and advice specific to your circumstances and changing tax laws.