Yes, it is possible to contribute up to 100% of your annual income to a 403(b) plan, although this is always subject to the annual Internal Revenue Service (IRS) contribution limits. While a plan may allow you to designate a very high percentage of each paycheck, the actual dollar amount you can contribute over the year is capped by federal regulations.
Understanding the 100% Contribution Rule
The allowance to contribute "up to 100% of annual income" means that if your income is relatively low, you might be able to contribute a very large percentage of it. However, this percentage is always subservient to the annual dollar maximum set by the IRS for elective deferrals. This ensures that even high-income earners cannot contribute an unlimited amount, and all participants are bound by the same absolute dollar caps.
For instance, if you earn $25,000 in a year and the maximum contribution limit for that year is $23,000, you could theoretically contribute close to 100% of your income ($23,000 out of $25,000). However, if you earn $100,000, you are still limited to the same $23,000, which would be a much smaller percentage of your overall income (23%).
Annual Contribution Limits for 403(b) Plans
The IRS sets specific limits on how much an individual can contribute to their 403(b) plan each year. These limits are periodically adjusted for inflation.
- Elective Deferral Limit: This is the primary limit for most employees' pre-tax or Roth contributions.
- Catch-Up Contributions: If you are age 50 or older by the end of the calendar year, you are eligible to make additional "catch-up" contributions above the standard elective deferral limit.
- Special 15-Year Rule: Some long-term employees of educational organizations, hospitals, or certain other tax-exempt organizations may qualify for an additional catch-up contribution if they have 15 or more years of service with the same employer and have contributed less than their maximum allowed in prior years.
Here are the typical elective deferral limits for recent years:
| Contribution Type | 2023 Limit | 2024 Limit |
|---|---|---|
| Employee Elective Deferral | $22,500 | $23,000 |
| Age 50+ Catch-Up | $7,500 | $7,500 |
Please note: These limits are for employee contributions. Employer contributions (like matching or profit-sharing contributions) are separate and are subject to an overall plan limit that includes both employee and employer contributions.
For the most current limits and detailed information, always refer to the official IRS website: IRS 403(b) and 457 Contribution Limits.
Practical Implications and Examples
While it's technically possible to designate 100% of your income for contribution, it's rarely practical for most individuals for several reasons:
- Living Expenses: You need money for daily living expenses, such as housing, food, transportation, and bills.
- Other Deductions: Even if your 403(b) contributions are pre-tax, you may still have other deductions from your paycheck, such as health insurance premiums, taxes on other income, or loan repayments.
- Annual Limit Constraint: The annual dollar limit means that for most people with a typical full-time income, 100% of their paycheck would far exceed the allowed contribution.
Example Scenarios:
- High Income Earner: An individual earning $90,000 annually in 2024 could contribute the maximum elective deferral of $23,000. While this is a significant amount, it represents only about 25.5% of their total annual income, not 100%. They would still receive the remaining portion of their pay for living expenses.
- Moderate Income Earner: An individual earning $30,000 annually in 2024 could contribute up to $23,000. In this case, their contribution would be approximately 76.7% of their annual income. If they chose to contribute this much, they would have very little take-home pay for the majority of the year to cover expenses.
- Age 50+ Scenario: A 55-year-old earning $40,000 annually in 2024 could contribute the standard $23,000 plus the $7,500 catch-up, totaling $30,500. This represents over 76% of their annual income.
In summary, the "100% of annual income" rule ensures that even those with lower incomes can maximize their retirement savings up to the dollar limit, but the binding constraint for everyone is the IRS annual dollar maximum.
