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Elective Deferral Limits

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A few months back, there was an article on this website entitled "The True Story on the Age 50 Catch-up: A simple Calculation or a Big Headache?"


Did anyone else read that article and question the author's statement that the lifetime maximum under the 15 year rule must be decreased by "all prior catch-up contributions..including Age 50 catch-up"?


On page 10 of IRS Publication 571, the IRS specifies that "catch-up contributions do not affect your MAC" (MAC being you maximum amount contributable for elective deferrals). It then states "therefore, the maimum amount that you are allowed to have contributed to your 403(b) account is your MAC *plus* your allowable catch-up contributions" (ie contributions under the Age 50 rule).



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I didn't read the article to which you refer, but I think I may be able to help clear up some of the confusion.


First of all, it's better not to think of the 15 year rule as a catch-up. In reality, it is a mechanism that allows for a temporary increase in the elective deferral limit. The normal limit of $13,000 (for 2004) may be increased by the lesser of (1) $3,000 or (2) the difference of $5000 times years of service over all prior elective deferrals. The increase is temporary to the extent that there is a $15,000 lifetime limit.


In addition, there is a true catch-up that is available to individuals age 50 or older, regardless of their years of service, past contributions, or any other factor. If you are age 50 at any time during the year, you may contribute an additional $3,000 (in 2004).


The age 50 catch-up is not factored into the calculation of determining the temporary increase in elective deferrals.


There is one caveat, however. If a person is eligible for both, the temporary increase in elective deferrals is used up first. For example, if a person is eligible to contribute $19,000 in 2004 ($13,000 plus $3,000 plus $3,000) and they contribute only $15,000, the $2,000 is considered part of the increase in elective deferrals, thus uses up part of the $15,000 lifetime limit. The participant is not entitled to designate the $2,000 as an age 50 catch-up.


Hope this helps.


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