Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE

By TFB

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:

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.

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Posted on February 24, 2009 under Taxes. Keywords: .

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Comments

30 Comments on Retirement Plans Galore: 401(a), 401(k), 403(b), 457, SEP, SIMPLE

  1. the weakonomist on February 25, 2009
     

    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!

  2. john on August 25, 2009
     

    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?

  3. TFB on August 25, 2009
     

    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.

  4. PatentGuy on September 6, 2009
     

    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?

  5. TFB on September 7, 2009
     

    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.

  6. caroline on March 1, 2010
     

    Hi,

    Great article. No one seems to address the 401a, and I was a little confused upon realizing that was what was left from my short former job at a university.

    I am a 27 year old with a very small leftover 401a account (a little over $1k). I understand that since my income is now low and i expect it to be higher in the future (just graduated from grad school a month ago and currently unemployed, unmarried) that rolling over into a Roth as opposed to traditional makes sense.
    However, it seems to me that with the advantages of possibly being able to contribute to both accounts 401a and my 401k or Roth 401k in future years, I should perhaps just keep this 401a until I am at a point where my income is such that I would prefer to contribute to both for tax reasons, and maybe just open my own roth ira separately.

    Can you please advise me on this? Is there value to keeping this little 401a account around?

    Thank you so much!

    Engr charlie

  7. R Mogyoros on April 13, 2010
     

    I work where I have a 401a where ONLY my employer makes contributions. I cannot elect to contribute any of my own salary to the 401a. My question is can I still contribute to a traditional IRA and get a tax deduction becuase this is the only kind of pension plan offered by my employer?

  8. TFB on April 13, 2010
     

    R Mogyoros – You can still contribute to a Traditional IRA. Whether you can get a tax deduction depends on your income and filing status. See IRS table. If you find yourself not able to take a tax deduction because of your income, you may consider contributing to a Roth IRA instead. Whether you can do that or not also depends on your income and filing status. See a different IRS table.

  9. alonza hanks on July 13, 2010
     

    i have a employer contributed profitsharing plan unemployment cut off gona lose every thing adminastrator says i cant roll it over into ira and that i cant have adistrabution or any thing 100 % vested plan says after 25 yrs of employment i can cash out admin saysonly if im employed by co. still and that they can do any thing they want that im just screwed
    please help if possable thank you

  10. sep retirement plan student on October 23, 2010
     

    As a self-employed worker, I have been researching the Sep Retirement plan, so am very glad to find such helpful information.

  11. Kerry on January 22, 2011
     

    if someone work for state gov. and they already contribute maximum 401K and 457, but later he figure out that they also have 401(a), can he also contribute it ? how much is max.

  12. TFB on January 22, 2011
     

    @Kerry – The contribution rate to a 401a plan is typically fixed. If you decide to participate in a 401a, you don’t have a choice in how much you contribute. That said, there is an overall limit of $49,000 a year for contributions to certain defined contribution plans at the same employer. That includes both employee and employer contributions to 401a, 403b, and 401k plans at the same employer. Contributions to a 457 plan are separate and don’t count toward the $49,000 limit.

  13. Michael on February 1, 2011
     

    Hi – I participate in the US Government’s Thrift Savings Plan (TSP), but wanted to know if I could also participate in a SIMPLE plan through a company that I consult with in the evenings. I currently contribute the max to the TSP. Thanks for your help.

  14. TFB on February 4, 2011
     

    @Michael – The maximum contribution limit applies to the aggregate of TSP and SIMPLE. If you already contribute the max to TSP, you can’t contribute additional money to SIMPLE unless you reduce your contribution to TSP. If the SIMPLE plan has a match but TSP doesn’t, it may be worth it to shift some contributions to the SIMPLE plan in order to get the match; otherwise just stick to TSP.

  15. Mel on February 6, 2011
     

    Do earnings in a Roth type (after-tax funded) 401a follow the same IRS rules as a Roth 401k regarding withdrawals? Pub 590 says that if you are 59.5 years old (or older) and the Roth 401k is at least 5 years old then earnings are tax free.

  16. TFB on February 6, 2011
     

    @Mel – Sorry, no. The after-tax funded 401a accounts are not Roth. Earnings are still taxable. Your original contributions are not taxable.

  17. Mel on February 8, 2011
     

    See http://www.macpa.org/Content/23674.aspx
    They and others say: A qualified Roth 401(k) distribution is not subject to taxes or penalties. The distribution is qualified if the Roth 401(k) account is held for more than five years and any one of the following applies:
    * The employee is over 59½ years old.
    * Death.
    * Disability.
    After a lot of reserarch I learned that company matches on a Roth 401(k) are kept in a separate “standard” (pre-tax) type account. When distributed, the employee contributions and “qualified” (see above) earnings are untaxable. Only the employer contributions and earnings are taxable upon distribution.
    [also see: http://www.irs.gov/retirement/article/0,,id=152956,00.html#irrreturn

  18. DG on February 22, 2011
     

    Can you roll an old 401(a) account into a new 401(k)? Is it just treated like a 401(k) rollover?

  19. TFB on February 22, 2011
     

    @DG – Yes if the 401(a) plan allows a lump sum distribution (some only give a monthly benefit after you reach a certain age) and your new 401(k) plan accepts incoming rollovers. In that case it’s treated just like any other rollovers.

  20. Sue on April 10, 2011
     

    About a 401(a). I had about $2500.00 in my 401(a) account from a previous employer where I have not worked for in over 2 years now. And I never made any contributions, just my employer did. Yesterday, I got an account statement showing that my 401(a) has a $0 balance and it says for the transactions – “Forfeiture” – $2500. I’m not understanding what happened? How did I lose all the money in this account. Can you please explain this and what I can possibly do to get my money back?

  21. TFB on April 11, 2011
     

    @Sue – A plan can have a vesting schedule. If you haven’t worked there long enough, the contributions can be forfeited. There’s nothing you can do.

  22. Sue on April 11, 2011
     

    Thank you for the reply. I did only work there for about one year and the was on disability leave for about one year. So does that count as employed there for 2 years? And also could I have prevented the forfeiture by having moved the money to another account such as another IRA or similar account?

  23. TFB on April 13, 2011
     

    @Sue – I would think it counts as two years. However the employer’s vesting schedule can require a minimum of five years of service. You could not have prevented the forfeiture by moving the money to an IRA. When you request the move, they know your years of service and they would apply the vesting schedule and see you haven’t satisfied the minimum service requirement.

  24. Sue on April 14, 2011
     

    Thank you again. This is a great site with very helpful information.

  25. Guy on July 5, 2011
     

    I work for a municipality and have had a 457 plan that recently changed to a 401A plan. I contribute 8% of my salary to the plan and it is matched by my employer. Am I better off with this plan or should I change back to the previous 457 plan which is an option. I am 61 yrs old and plan on taking an early retirement at 62.

  26. andrea on October 21, 2011
     

    So what you are saying is that the 401(a) is not mine to take but the employers (company) money they are puting in my account? To receive this money i have to switch over to a 401(k) plan? This is to confusing.

  27. Joy on January 30, 2012
     

    I am the Clerk for the CIty and I have a question that the IRS and our retirement company is not giving me a straight answe-I need to get W2′s out and have a question reference to 401a retirement. The city and the employees put into this retirement fund, so box 12 on the W2 should have the amount the employee had deducted, should this not be subtracted from total gross wages in box1 (wages, tips, other compensation) because we are pre taxed in payroll. Thank you for your help!!!

  28. TFB on January 30, 2012
     

    @Joy – Yes I would think an employee’s contribution to a 401a plan should not be included in box 1.

  29. Jason on January 31, 2012
     

    I have two jobs, one with the state and one with a state affliated non-profit. The non-profit has an employer 401(a) contribution of $49,000. Some of my co-workers with the same employment situation also take part in voluntary deferral to the state’s 401(k). Half of us think this is wrong, the other half are counting it as two separate employers and say we could do both the 401(a) and 401(k) [to the sum of roughly $64,000 per year]. We wrote the IRS several times and have not gotten a ruling. Do you know? Do you have a reference? (State of Kansas). Thanks.

  30. TFB on January 31, 2012
     

    @Jason – The $49k (now $50k in 2012) is per-employer. So it comes down whether the non-profit and the state are two employers. If you have two jobs and you are getting two W-2′s with different employer tax IDs, they are two employers. A reference? Internal Revenue Code section 415(f)(1)(B):

    “(B) all defined contribution plans (whether or not terminated) of an employer are to be treated as one defined contribution plan.”

    Note it says “an employer.” The employer is responsible for the annual addition limit. One employer is not supposed to know or track what other employers are doing to the same person. So each employer gets its own limit.

    Compare that to Code section 402(g)(1)(A) for employee elective deferrals ($16,500 in 2011; $17,000 in 2012):

    “Notwithstanding subsections (e)(3) and (h)(1)(B), the elective deferrals of any individual for any taxable year shall be included in such individual’s gross income to the extent the amount of such deferrals for the taxable year exceeds the applicable dollar amount.”

    Note it says “any individual” which means across all employers. Any individual person knows how much he or she is contributing to which plans. The individual is responsible to stay under the elective deferral limit across all plans.

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