Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE
A reader sent me an e-mail some time ago about the interplay between a 401(a) plan and a Roth solo 401(k) plan. You probably heard of 401(k), 403(b), and 457 plans. The names of these plans come from the section numbers in the tax code which specify the rules for these plans.
401(k) plans are offered primarily by private sector employers. Employees in public schools and tax-exempt organizations have 403(b) plans. State and local governments and tax-exempt organizations have 457 plans. Some employers offer both a 403(b) plan and a 457 plan. What is a 401(a) plan then?
Strictly speaking a 401(a) plan is a bit of a misnomer because other kinds of plans including 401(k) plans must also qualify under tax code 401(a). In a loose context, a 401(a) plan is a retirement savings plan in which employees can't choose or change the amount contributed to the plan. It's also called a "money purchase plan."
In a 401(k) plan, employees make so-called "elective deferrals" which means that employees have a choice between (a) contribute to the plan and defer income tax on the contributions; and (b) receive the money in cash and pay the tax. In a 401(a) money purchase plan, either the employer contributes to the plan all by itself OR the employer makes it mandatory for all covered employees and deducts a set percentage from everybody's paycheck.
As a result, contributions to a 401(a) plan do not count toward the 401(k) "elective deferrals" limit ($16,500 in 2009). If someone has a both 401(a) plan and a 401(k) plan, he or she can still contribute up to $16,500 in 2009 to the 401(k) plan. Contributions to a 403(b) plan or a SIMPLE IRA also count toward the same 401(k) elective deferral limit, but contributions to a 457 plan do not (go figure).
I don't work in the employee benefits field any more. It still amazes me how many different types of retirement plans we have in the tax code and how they have similar but different rules. We've got this alphanumeric soup:
- 401(a) money purchase plan
- 401(k) plan (with Traditional and Roth accounts)
- 403(b) plan (with Traditional and Roth accounts)
- 457 plan (no Roth yet, why?)
- SEP (no employee contributions allowed, why?)
- SIMPLE 401(k) (lower contribution limit than regular 401k, why?)
- SIMPLE IRA (no Roth, why?)
Why can't we just have one type of plan regardless where you work? The more you look at anything related to the tax code, the more you see it's a total mess.
Software picked, likely related posts:
- Alternatives to a High Cost 401k Or 403b Plan
- Feel-Good Retirement Savings Initiatives
- 401k Loan Double Taxation Myth
Comments
5 Comments on Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE
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the weakonomist on February 25, 2009 |
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john on August 25, 2009 |
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PatentGuy on September 6, 2009 |
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Wow, that was a 401(mess). I didn't know there were other variations in the tax code beyond 1(k) and 3(b).
Good clarification!
If an individual has a 457B plan through a Government agency can he also contribute to his 401K through his other employer? if so what are the limits to both accounts in a single calendar year?
john – I said in the post contributions to a 457 plan do not count toward the 401(k) elective deferral limit. So, yes, that individual can contribute to both the 457 plan and the 401k plan. The limits are $16,500 for *each* plan, for a total of $33,000. If the individual is 50 years or older, there is a catch-up of $5,500 to each plan, making the total limits $44,000.
Aloha FB, Me again. Two questions.
Regarding Roth 401(k) and 403(b), is there an income limit to participate? should I cut off contributions to my traditional 401(k) and put them in Roth 401(k) (we offer Roth 401(k). Can you also put the profit sharing plan contributions (about $30K this year) into a Roth 401(k)?
One of my wife's 403(b) plans is a TSA. She cut-off contributions early on and switched to a different plan (same employer) in which she actively contributes in equity mutual funds. To make live a bit easier, she could transfer the balance from the TSA plan to the equity finds plan, BUT the TSA has a “early withdrawal” penalty (I think 6%) if she transfers the funds within 6 or 7 years of their original contribution. As a result, we have never consolidated the TSA 403(b) into her active 403(b). Are we being penny-wise, pound-foolish? Should we bite the bullet and get out of the TSA despite the penalty, or wait it out before doing so?
PatentGuy – There is no income limit for Roth 401(k) or Roth 403(b). That's an advantage over Roth IRA. If you max out everything and still want to shelter more, see Roth 401(k) for People Who Contribute the Max. The employer contributions still go into the regular/traditional 401(k)/403(b) account.
For the TSA, you will have to see what's in it (fixed interest? how much?) versus what her active equity funds are. If you post the details in Bogleheads forum, you will get good answers.
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