Author Topic: Work says we can contribute double the tax-deferred limit  (Read 7416 times)

Mom to 5

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Work says we can contribute double the tax-deferred limit
« on: November 11, 2013, 07:07:18 AM »
Wow!  I hadn't heard of this!  Do any of you have a plan like this?

"Having both a 403(b) plan and 457(b) plan is unique to an institution such as ours.  It means you candouble the tax-deferred limit."

Good to know.  I just had never heard of this on here.  If only salary were higher to make this possible for us to contribute more....

avonlea

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Re: Work says we can contribute double the tax-deferred limit
« Reply #1 on: November 11, 2013, 07:27:43 AM »
My husband has a plan like this, too.  Both accounts are not maxed in this household either. :) His retirement contributions at work are basically divided between the two.

seattlecyclone

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Re: Work says we can contribute double the tax-deferred limit
« Reply #2 on: November 11, 2013, 09:46:24 AM »
That was an option when I worked for a state university, but I was a teaching assistant at the time and I could only afford to max out the 403(b) account.

TheDude

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Re: Work says we can contribute double the tax-deferred limit
« Reply #3 on: November 11, 2013, 12:02:42 PM »
I am so jealous I have been asking my wife's charter school to add a 457 for the last two years. It really is quite the deal.

RadicalPersonalFinance

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Re: Work says we can contribute double the tax-deferred limit
« Reply #4 on: November 11, 2013, 12:57:59 PM »
The 403(b) is a tax-qualified plan so it's subject to its limit of $17,500 deferrals / $51,000 total additions to the plan.  The 457 plan is not a tax-qualified plan so it's subject to separate limits, currently $17,500 deferrals.

To go really nuts, you could additionally layer on separate IRA or Roth IRA accounts under their rules!

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---403(b)-Contribution-Limits

http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans

Rural

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Re: Work says we can contribute double the tax-deferred limit
« Reply #5 on: November 11, 2013, 06:29:43 PM »
Check and see if he qualifies for an HSA, too. The combination of 403(b), 457, and HSA is pretty sweet.

LowER

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Re: Work says we can contribute double the tax-deferred limit
« Reply #6 on: November 11, 2013, 07:10:23 PM »
The 403(b) is a tax-qualified plan so it's subject to its limit of $17,500 deferrals / $51,000 total additions to the plan.  The 457 plan is not a tax-qualified plan so it's subject to separate limits, currently $17,500 deferrals.

To go really nuts, you could additionally layer on separate IRA or Roth IRA accounts under their rules!

http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics---403(b)-Contribution-Limits

http://www.irs.gov/Retirement-Plans/IRC-457(b)-Deferred-Compensation-Plans

Great advice.  I do all of the above, and just wish I knew about it years ago.

One caution: if the 457 is non-governemental, and your company bankrupts or gets sued to zero, you're out all of those 457 funds, completely, and without recourse as far as I know (which isn't much regarding those rules/laws).

TheDude

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Re: Work says we can contribute double the tax-deferred limit
« Reply #7 on: November 11, 2013, 07:32:14 PM »
Do you have it where you work, Dude? I would assume there would be less interest at a charter school if they get paid equivalent to public school teachers.

I work for a little private company all we have is a Simple IRA plan so our limit is 12000. My wife makes a little less than the local district. From what I have gather there are three or four of us interested in a 457. Its kind of frustrating becuase they switch about two years ago from using the district benfits (who have a 457) to doing their own. Now she only has access to a 401k and 403b. Here in Colorado teachers are part of PERA so I think all in all there is little interest in saving money via 401k let alone 457.

jfer_rose

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Re: Work says we can contribute double the tax-deferred limit
« Reply #8 on: November 12, 2013, 09:27:25 AM »
The 457 plan is not a tax-qualified plan...


Huh? I'm confused. Maybe I don't understand what tax-qualified means but I would think that a 457(b) plan is tax-qualified as I have one and I don't pay taxes on the money I contribute there. Clicking the link, it looks like 457(b) plans are tax deferred but not 457(f).

Abe

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Re: Work says we can contribute double the tax-deferred limit
« Reply #9 on: November 12, 2013, 07:42:37 PM »
457(b) limits are separate from 401k limits.

From IRS:
http://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan%3F

My parents have both and I maxed their contributions to both without issues, in North Carolina. $94,000 tax-free! Makes up for being paid 30% less than private sector.
 

ch12

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Re: Work says we can contribute double the tax-deferred limit
« Reply #10 on: November 13, 2013, 04:03:55 AM »
Being able to double up was part of RootofGood's strategy to reduce his taxes on ~$150,000 in income to $150.

http://rootofgood.com/make-six-figure-income-pay-no-tax/


Look at the post if you want specifics - it includes investing stuff plus child tax credits and all kinds of things.

RootofGood

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Re: Work says we can contribute double the tax-deferred limit
« Reply #11 on: November 13, 2013, 11:05:56 AM »
457(b) limits are separate from 401k limits.

From IRS:
http://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan%3F

My parents have both and I maxed their contributions to both without issues, in North Carolina. $94,000 tax-free! Makes up for being paid 30% less than private sector.

I was in North Carolina as well and I also viewed the double contributions as a form of additional compensation for accepting a below private market salary. 


RootofGood

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Re: Work says we can contribute double the tax-deferred limit
« Reply #12 on: November 13, 2013, 11:07:33 AM »
Being able to double up was part of RootofGood's strategy to reduce his taxes on ~$150,000 in income to $150.

http://rootofgood.com/make-six-figure-income-pay-no-tax/


Look at the post if you want specifics - it includes investing stuff plus child tax credits and all kinds of things.

Thanks for sharing that!  It's kind of awesome to make a fat salary and pay almost zero tax.  Of course being able to live on a small fraction of your salary is key to maxing out all your savings options.

RadicalPersonalFinance

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Re: Work says we can contribute double the tax-deferred limit
« Reply #13 on: November 14, 2013, 02:21:43 PM »
The 457 plan is not a tax-qualified plan...


Huh? I'm confused. Maybe I don't understand what tax-qualified means but I would think that a 457(b) plan is tax-qualified as I have one and I don't pay taxes on the money I contribute there. Clicking the link, it looks like 457(b) plans are tax deferred but not 457(f).

Sorry, I'm using confusing financial lingo words, but it's the most precise way to communicate the difference.  Generally, "tax-qualified pension plan" means that the plan has to conform to the rules set by ERISA ( http://en.wikipedia.org/wiki/Employee_Retirement_Income_Security_Act ). 

ERISA compliance is somewhat burdensome, but necessary.  Tax-qualified plans include money purchase pension plans, target benefit pension plans, profit sharing plans (the most popular type of which is the 401(k), and stock bonus plans.

There are other retirement plans that are much simpler (because they don't have to comply with ERISA) and they're called non-tax-qualified retirement plans.  Examples would be SIMPLE IRAs, SEP IRAs, SARSEPS, and 403(b)s (which are subject to ERISA only if the employer contributes).

All of the tax-qualified plans have to coordinate the deferral limits according to the IRS tables I linked to.

457 plans are not retirement plans; most importantly, they're not tax-qualified pension plans.  They are technically nonqualified deferred compensation plans.  Therefore, although they allow you to defer the taxes (which is the tax benefit you're referring to), they don't have to integrate with the 401(k) numbers.

If you're really into this stuff, you could have a lot of fun figuring out ways to layer the plans together, but in real life most people either have one job or one business and are going to simply use one or two types of plans.

But, for fun, you could have an Advanced Mustachian individual age 55 who works for a private company (for example a private law firm), a second, unrelated private company, and a governmental organization (for example a local/municipal government organization) too.  Theoretically that individual could set this up in 2013:

1. Defer $17,500 of their income into a profit sharing plan with 401(k) provisions at the law firm.  The firm could make additional additions to the plan up to a total of $51,000.  They can also make an additional $5,500 catch-up contribution. Total into plan = $56,500 ($17,500 deferral, $33,500 employer additions, plus $5,500 catch-up contribution).  (All of this has to comply with the ERISA rules for non-discrimination between employees. Consider opportunities for a solo 401(k) though.)

2. If the second, unrelated private company were to have a money purchase plan, that company could make a contribution of $51,000 into his account.

3. If the governmental organization has a 457 plan, he can defer $17,500 of income into that plan plus an additional $5,500 of catch-up contributions.  In fact, if he is an employee with 15 years of service with the same employer, there's an additional $3,000 catch up available.  (Total would be $26,000 into that plan: $17,500 + $5,500 catch up + $3,000 bonus catch up.)

If we wanted to get stupid, we could layer in non-deductible IRAs with Roth conversions, HSAs, additional non-qualified deferred comp plans, etc.

Obviously this is a made-up scenario.  I've never seen a situation like this but it is theoretically possible.  Usually if the person were this engaged in their planning they would be quite wealthy and we'd move out of the retirement plan discussion more into the estate planning discussion and use different techniques.  The problem with all these retirement plans is that at some point the money has to come out and the tax be paid (either RMDs or at death) and we might want it in a different bucket or we might want it outside of the estate. 

But hopefully it illustrates the meaning of the term "tax-qualified" in an interesting way.

RadicalPersonalFinance

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Re: Work says we can contribute double the tax-deferred limit
« Reply #14 on: November 14, 2013, 02:31:32 PM »
One caution: if the 457 is non-governemental, and your company bankrupts or gets sued to zero, you're out all of those 457 funds, completely, and without recourse as far as I know (which isn't much regarding those rules/laws).

To the best of my knowledge, this is correct and is an important distinction.  457 plans are assets of the company and, as such, are subject to the claims of the company creditors.  457 plans are nonqualified deferred compensation plans.  As such, the employee is not taxed on the funds until he receives them.  (This includes S.S./Medicare taxes too.)  The employee is not taxed because there is no "constructive receipt" of the funds and the funds are subject to a "substantial risk of forfeiture."  Substantial risk of forfeiture includes the claims of the company (would be a non-profit) creditors.

The only way to eliminate this risk is to receive the money...which triggers the taxation (because now there is constructive receipt and there's no risk of forfeiture).

It's not allowed to roll funds from a nongovernmental 457 plan into an IRA.  This is an allowed option if it's coming from a governmental 457...but those don't face the same risk of loss as described above.

Ultimately, you have to look at each situation on a case-by-case basis.  Don't let the tax rules wag the dog...decide what your specific goals are then work to figure out the best solution on a case-by-case basis.  It will be different for each person.

jfer_rose

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Re: Work says we can contribute double the tax-deferred limit
« Reply #15 on: November 14, 2013, 02:34:29 PM »
Thanks for the thorough explanation 7years! I guess I've gotten used to calling my 457(b) my workplace retirement plan because that's the only plan my employer offers that I can contribute to. (They put aside 5% of our salaries into a 401(a) but we are not allowed to contribute to that). But you are right-- it's actually a deferred compensation plan. Which I am lucky to have as someone who hopes to retire early!

RadicalPersonalFinance

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Re: Work says we can contribute double the tax-deferred limit
« Reply #16 on: November 14, 2013, 02:36:38 PM »
Thanks for sharing that!  It's kind of awesome to make a fat salary and pay almost zero tax.

RootofGood, that's a job well done.  Great article and good for you for showing people their options.  Let's see if you can get rid of that $150 tax bill this year though...you need to clean things up a bit. ;)

RadicalPersonalFinance

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Re: Work says we can contribute double the tax-deferred limit
« Reply #17 on: November 14, 2013, 02:40:53 PM »
...because that's the only plan my employer offers that I can contribute to.

You're welcome!  Remember though that you can always set up your own plan...just start a business and set up a plan through there!  It's really not that tough to do...

(Obviously you have to want to run a business...otherwise, just do IRAs and HSAs and tax-efficient investing through low-turnover investments or inside annuity or life insurance contracts if you're going to do a lot of turnover.)

[EDIT]
Oh...or find another employer! ;)
« Last Edit: November 14, 2013, 02:44:13 PM by 7years »

RootofGood

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Re: Work says we can contribute double the tax-deferred limit
« Reply #18 on: November 14, 2013, 08:27:40 PM »
Thanks for sharing that!  It's kind of awesome to make a fat salary and pay almost zero tax.

RootofGood, that's a job well done.  Great article and good for you for showing people their options.  Let's see if you can get rid of that $150 tax bill this year though...you need to clean things up a bit. ;)

Problem solved going forward.  I retired.  AGI will drop sharply.  We'll have a very negative federal income tax in 2014 with the refundable additional child tax credit (x3 kids).

RadicalPersonalFinance

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Re: Work says we can contribute double the tax-deferred limit
« Reply #19 on: November 15, 2013, 07:32:27 AM »
Nice! I like that solution.

rocketman48097

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Re: Work says we can contribute double the tax-deferred limit
« Reply #20 on: November 15, 2013, 02:01:47 PM »
Unless there is a match involved, max out the 457 plan first.

The reason, unlike the 403 plan, you can pull money at any age out of the 457 plan without a 10% early withdrawal on your income taxes.  For early retirees, this is a real concern.  I overfunded my 401k plan and now only put up to the company match since the 401k plan is aged restricted and this doesn't work well for early retirement. 

ch12

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Re: Work says we can contribute double the tax-deferred limit
« Reply #21 on: November 15, 2013, 06:13:19 PM »
The reason, unlike the 403 plan, you can pull money at any age out of the 457 plan without a 10% early withdrawal on your income taxes.  For early retirees, this is a real concern.  I overfunded my 401k plan and now only put up to the company match since the 401k plan is aged restricted and this doesn't work well for early retirement.

What does work for early retirement is slowly converting a year's worth of money at a time. You have to wait 5 years for the first withdrawal, but Mustachian early retirees will have lots of time and cash.

Mad FIentist calculates that 401k conversion can cut off 2 years of work. That's worth reading about. http://www.madfientist.com/retire-even-earlier/