4042 / What limits exist with respect to excludable contributions to a tax sheltered annuity?

An employee generally can exclude from gross income the contributions paid by the employee’s IRC Section 501(c)(3) or public school employer to a retirement annuity for the employee’s benefit.¹ The amount that the employee may exclude in the employee’s tax year is limited.

For taxable years beginning after 2001, there are two limits to be considered. The first is the overall limit ( Q 4043). The second is the limit on the amount that may be excluded under a salary reduction agreement ( Q 4047).²

For taxable years beginning after 2001, the exclusion allowance is permanently repealed.³

If the entire contribution in the year is by salary reduction, only the lowest of the two limits may be excluded. If the contribution is partly salary reduction and partly additional contribution, the salary reduction portion is limited to the salary reduction limit, and the excludable contribution may not exceed the IRC Section 415 limit.⁴ The effect of contributions that
exceed these limits is explained in Q 4046, Q 4047, and Q 4053.

The IRC Section 415 overall limit (see Q 4043) applies to contributions and other additions regardless of whether they are vested or not.⁵