Sunday, February 04, 2007

Contribution limits for multiple retirement plans

A recent poster asked how contribution limits are effected if you have more than one retirement plan. For example, a 403(b) at work and an indivual 401(k) for a side business.

Here is my best shot:

1. Multiple defined contribution plans - usually ERISA qualified: 401(k), 403(b), SEP-IRA - individual 401(k) falls into this category: You can defer the annual salary deferal ($15,500 in 2007) across all plans in aggregate; i.e. if you have 2 or 3 plans, you cannot defer more than $15,500 total for all plans. In addition, employer matches/profit shares cannot exceed the annual maximum contribution of $45k total for all accounts. Additional catch-up contributions are available for those over 50 years old (additional $5k).

2. I don't think you can deduct an IRA if you have a 401(k), but you can still contribute to an IRA, however, you must make a point of filing the appropriate tax form to tell the IRS you have non-deductible IRA contributions - this sets your basis correctly for future withdrawels. Also, you can convert your non-deductible IRA to a Roth IRA (which you can do even if you don't normally qualify for Roth IRA contributions). Additional catch-up contributions are available for those over 50 years old (additional $1k).

3. A qualified plan 401(k) (defined contribution plan) and a pension (defined benefit plan). This is pretty interesting. You definately need to investigate this with a sophisticated advisor - I believe empty spaces at is doing something like this. Basically, you have both accounts. You can defer the maximum salary deferal $15,500 to your 401k and then make payments to your pension plan - the exact amount is calculted by an actuary based on your age and the statistical likeliness of you having a pot of $x.xx available by the time you retire. The younger you are the less you can defer. For me in my late 30s, I think it would come to an additional $45k. That's quite a bit of extra tax deferal.

4. IRAs and Roth IRAs - I'm not sure if you can defer income to both - I doubt it. Probably one or the other - anyone have any ideas? I've never been qualified for a Roth, so it hasn't been a priority for me. Per anonymous - it's likely you cannot contribute more than the maximum annual contribution in aggregate.

5. 457 plans allow non-profits and government institutions to offer a second parallel retirement program to 401k and 403b plans. Contributions to a 457 plan (up to $15,500 in 2007 or 20,500 for those over 50) do not affect salary deferal contributions to a 401k plan. 457 plans allow you to double your salary deferal options when combined with a qualified plan such as a 401k or 403b. You can check out an interesting discussion of combined savings here.

Regards, makingourway

PS 2007-02-09: I've updated this to reflect over 50 catch-up contributions.


mOOm said...

I assumed you could do $4000 in any combination of Roth and IRA on top of the 401k $15,500 and the IRA would be pre-tax. But maybe I'm wrong. I wouldn't think of doing a traditional IRA. I have a Roth and 403b both I am now maxing.

Anonymous said...

1. If you participate in a workplace retirement plan like the 401k, your contributions to a traditional IRA MAY be deductable depending on income.

2. The 4000 limit (for 2007) applies to both the ROTH and traditional IRA combined. So, you can contribute to both every year, but the combined contribution can not be more than the limit

Anonymous said...

Others pointed out the correction on the IRA limits, but you missed several important points to mention:

- The catch-up contributions, generally if you are over 50, can be significant.
- If you happen to work for a municipality or state that has a 457 plan, you can contribute with that too

There are many good references on the net, the following summary is one of the more legible and complete (IMHO)

But even this one missed mentioning the Solo-401(k) which you mentioned in a previous post and is a nice option if someone has a side business.

Empty Spaces Inc. said...

Quite right, I do have a 401k-pension plan combo through my C-corp.

you pay payroll tax going into it, but then its tax deferred until you pull it out. also, i'm the trustee so I get to invest where ever i want.

so far i've invested in 2nd trust deeds, and oil and gas project and a loan to a privately held business.

Larry Leveen said...

It is difficult to find out whether one who has BOTH a Roth IRA and a Roth 401K can maximize contributions to both accounts. The IRS website (and the web as a whole) is woefully insufficient when it comes to this. I have been unable to find any definitive information about this issue yet. Ideally, I'd find (or someone could provide we with) an IRS citation about this question.