Series. Part 2 of 4. Employer-provided Plans: 401Ks, 403Bs, and 457Bs.
In this series of four, we are talking about various tax advantageous retirement and savings vehicles and their maximum contribution amounts. We hope that you check on your progress towards maxing it out.
Last week we talked about the vehicles: Traditional & Roth IRAs. This week we continue with garages they can be parked in: Employer-provided retirement plans: The 401K, 403B, and 457B. An employer-provided plan is the big parking garage that you and all your co-workers park your cars in.
REINFORCING THE BASICS!
What is a 401K? A 401K is a retirement plan offered by private employers. Some employers might even pitch in towards your golden years as well by matching, basically giving you some money that you can spend decades from now. Putting money in IS ALWAYS tax deductible. Taking money out IS ALWAYS taxable as ordinary income and unless you have an IRS approved good excuse there is a whopping punishment if you take it out before you are 59 ½ years old. Remember from last week the whopping punishment is a 10% penalty blasted onto your tax return.
What is a 403B? A 403B is a 401K for public schools, not for profit hospitals, charities, (mostly the ones you would donate to) and clergy that work for themselves.
457Bs are 401Ks for state and local government workers. That would be the DMV employee who took that not so attractive picture of you and the police officer you hope didn’t clock you on the way to work this morning.
HOW LONG HAVE THESE BEEN AROUND?
The 401K’s first public appearance was way back in 1978 when disco was popular and the initial max it out employee contribution was $45,475.
The 403B’s first public appearance was way, way back in 1957 when Elvis Presley was All Shook Up and the initial max it out contribution was who can remember?
Let’s just say the 457B has been around for a minute.
Congress invented the catchup contribution for people over 50 back in 2001. In practice, when you get a snail mail postcard promising you a free tote bag when you sign up for AARP, you will know you can now play catch up in your retirement accounts if you so desire.
HOW MUCH CAN I CONTRIBUTE IN 2020?
For 401Ks, 403Bs, and 457Bs, the employee max it out amount is the lower of your salary X the maximum percentage limit OR $ amount as spelled out in the employer plan OR $19,500 and add $6,500 if you’re over age 50 and want to catch-up. This is the tax deductible, pre-tax, tax-free contribution amount. The employer max it out is $37,500 for a total of $57,000.
If employer-offered, these plans also have an after-tax contribution feature that allows for up to $57,000 in contributions and works like this: $57,000 – $19,500 – Employer contributions = can be contributed by you after-tax.
IS THERE AN INCOME LIMIT FOR CONTRIBUTING?
It depends if your 401K, 403B, or 457B is Traditional or Roth. There is no limit if it’s Traditional. Roth IRA contributions are limited by Modified Adjusted Gross Income (MAGI). If you are single, head of household or married filing separately: you can max it out if MAGI is less than $124,000; contribute some if between $124,000 and $139,000; and, NO contributions at all if MAGI is more than $139,000. For married folks those amounts are: $196,000 and $206,000.
HOW MUCH OF MY 2020 CONTRIBUTION IS TAX DEDUCTIBLE?
Traditional 401Ks, 403Bs, and 457Bs are the same as Traditional IRAs and we blogged that last week: Series. Part 1 of 4. Individual Retirement Accounts: Traditional & Roth.
Roth 401K, 403B, and 457B contributions are never tax deductible.
HOW MUCH IS THAT MATCHING AMOUNT IN 2020?
For 401Ks, 403Bs, and 457Bs, most employers will generally match 3% to 6% of what you contribute with a max it out amount of $37,500.
CAN I CONTRIBUTE AFTER I RETIRE?
You are no longer working for this employer, so…no. But if you have a Traditional IRA you can contribute for as long as you want, as the 70 ½ has been legislated away. And if you have a Roth IRA you can contribute no matter how old you become, so max it out.
WHEN CAN I GET MY MONEY?
Short answer is 59 ½. If this next part sounds familiar, it is because you read it last week. Proceed to next section.
After age 59 ½: Traditional AND Roth. If you were hoping to hang onto it and leave it untouched for a while you can. Until you are 72, then if you have Traditional IRAs the government makes you start taking your money out annually as a Required Minimum Distribution (RMD). You can take out more than the RMD but not less. And if you don’t take out the minimum, the punishment can be HUUUGE!, as that RMD amount not withdrawn is taxed at a whopping 50%. Take it out and spend it or not spend it, or put it in a Roth IRA. Take it out it even if it means sacrificing more earnings. Just Do It.
Just like being responsible for the accuracy of your tax returns, you are responsible for the accuracy of the RMD. There are folks who will help you though, namely the IRA custodian or plan administrator.
There is no RMD with a Roth IRA. You are not forced to start withdrawing, not at 72, not at 82, not even at 92, not even after you die because there is no RMD for your beneficiary either.
WHAT IF I NEED SOME CASH BEFORE I’M 59 1/2?
The answer to this is the same as last week too – You can skip this part.
Sure, you can withdraw from the Traditional IRA. Remember the withdrawn amount will increase your income and possibly put you in a higher tax bracket AND THEN there is the punishment. There are times when you can take your money out of Traditional IRAs without being punished.
These are times of:
→Paying for health insurance premiums when unemployed for at least 12 consecutive weeks;
→Paying for medical expenses which total more than 10% of your adjusted gross income;
→Paying for college for yourself, your spouse, your kids, and even your grandkids;
→Disability as defined by the IRS and backed up by a doctor’s verification;
→Inheriting an IRA from your spouse and even folks you aren’t or were never married to;
→Buying, building, or rebuilding a house for the first time for yourself, your spouse, both sets of parents and grandparents and all the kids and grandkids;
→Serving your Country (Reserve and National Guard) for more than 179 days;
→Withdrawing on a specific schedule (SEPP – Substantially Equal Periodic Payments);
→And, there’s the time the IRS personally snatches unpaid taxes.
There are two kinds of money in Roth IRAs. 1. Principal – The money you put in/contributions and 2. Earnings – Interest, dividends, capital gains, and the like. Remember withdrawals are tax-free but if the money taken out is earnings, a 10% penalty will be blasted on your tax return.
WHAT OTHER THINGS SHOULD I KNOW ABOUT EMPLOYER-PROVIDED PLANS?
→If your employer offers a 401K/403B and a 457B plan you can contribute to both.
→Some 457Bs offer a turbo catch-up three years before retirement age, turbo being twice the annual pre-tax contribution limit. In 2020 the turbo amount is $39,000.
→Even if you have a 401K at work, if you can swing it, start an IRA. Potentially tax deductible and potentially better return than interest earned on a savings account.
There are exceptions to most rules and more than one way to cook an egg. So, if you are considering contributing or withdrawing funds, changing your contribution strategy, rolling over or transferring, converting or recharacterizing existing retirement accounts, or recently inherited an IRA it is super important to reach out to McAtee and Associates for answers and guidance. #CallCarolFirst!
firstname.lastname@example.org OR 727-327-1999.
Check back here next week for part three of our four-part series: self-employed retirement plans and be sure to check us out on and ; for whatever it is we’ll be posting. And remember to max it out.
McAtee and Associates’ Disclaimer:
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