How to Increase Your 403(b) Contribution

By Maurie Backman Markets Fool.com

Because Social Security won't provide enough income to cover the typical retiree's living costs in full, workers need to save independently to ensure that they have enough money down the line. If you have a 403(b) plan, you should know that the more you contribute during your working years, the greater your chances of retiring comfortably. It pays to increase the percentage of salary you put into to your 403(b) until you hit the annual contribution limit for your age. Furthermore, you should always make sure to put in enough of your own money to capitalize on whatever employer matching funds you're offered,

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What is a 403(b)?

If you're not familiar with the 403(b), it's probably because you either don't have one or just recently started working for a company that offers one. A 403(b) works just like a 401(k) in that it's a tax-advantaged retirement account for workers. Those who are government employees or work for tax-exempt organizations like hospitals and schools are typically offered a 403(b) in lieu of a 401(k).

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Putting money into a 403(b) early on in your career can help you build a sizable nest egg, because unlike traditional investment accounts, where you pay taxes on your gains as you earn them, 403(b)s get to grow on a tax-deferred basis. This means you won't pay money on your investment gains year after year, but rather, you'll pay taxes on the withdrawals you take in retirement. Furthermore, because traditional 403(b)s, like 401(k)s, are funded with pre-tax earnings, the more you contribute, the more you lower your income taxes up front.

Increasing your 403(b) contributions

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Another major advantage of the 403(b) is its generous annual contribution limit. Currently, workers under 50 can put up to $18,000 a year into a 403(b), while those 50 and older get a $6,000 catch-up that raises the limit to $24,000. Most people can't max out these limits from the start, but if you work on increasing your contributions year after year, there's a good chance you'll build a considerable nest egg in time for retirement. In addition, ramping up your contributions might enable you to take full advantage of your employer's match, which will help you pad your account even further.

Here are a few strategies for increasing your contributions:

  1. Filter any extra or "found" money you receive into your 403(b). This includes holiday gifts that come in the form of cash, performance bonuses, commissions, and tax refunds.
  2. Anytime you get a raise, elect to have that additional money go directly into your 403(b). This way, you won't miss it.
  3. Work a few hours here and there on the side to bring home extra income. You can use that money to pay for some of your expenses so that you're able to allocate more of your actual salary to your 403(b).
  4. Make a couple of minor lifestyle changes, like skipping a few restaurant meals each month, to lower your spending. This will give you the flexibility to contribute more to your 403(b) and bring home less money per paycheck.
  5. Consider one major lifestyle change, like getting a roommate, downsizing your living space, or giving up a vehicle if you have the option to get around with public transportation. Making one such change on even a temporary basis can tide you over until you're earning enough to increase your contributions without having to take such drastic measures.

What will an increase do for you?

Increasing your 403(b) contributions will certainly require a degree of effort on your part, but if you're willing to make some sacrifices, you stand to benefit in a very big way. But don't just take our word for it. Rather, use the following calculator to see what a difference an increase in contributions might make over time:

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

As you'll see by using this tool, you'll wind up putting in a lot less of your own money than what you'll ultimately gain in additional retirement income, and it's all due to the power of compounding. When you fund a 403(b) early on in your career, you give yourself several decades to accumulate wealth. And the more money you put into your 403(b), the more growth you'll have the potential to achieve. That's why it pays to push yourself to ramp up your contributions over time -- because there's really no such thing as having too much money in retirement.

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