Sincerely, Maxing Out
$ ?s answered by Matthew Illian, CFP®
Dear Maxing Out,
Like many doctors and reservists, you have the opportunity to participate in multiple retirement plans. There are no limits on how many retirement accounts you can have, but a complicated set of rules govern how much you can shelter from the Tax Man each year.
Let me begin by listing the most common types of retirement plans and who is eligible to participate in each.
401(k): Employees of private companies
403(b): Employees of public schools and nonprofits
457: State and local municipal employees (including public hospitals)
Thrift Savings Plan: Employees of the US government
Individual (or “solo”) 401(k): Self-employed business owner(s) and spouse
SEP or Simple IRA: Self-employed or small business employees
First, you need to know that 457 plans are unique. All other so-called qualified retirement plans must aggregate their employee contribution limit. This means that a participant in a 401(k), 403(b), or Thrift Savings Plan is only allowed to defer a total of $17,500 from their income in 2013 between all three plans (click here to see limits from prior years). Those who qualify for a 457 plan and a second employer sponsored plan can double up their savings for a total of $35,000. People age 50 or older can save an additional $5,500 as a catch-up provision for a total limit of $23,000 per plan or $40,500 across two plans. If you are wondering why this number was not doubled, the 50+ catch up can only be used once across all plans.
Assuming that you are under age 50, I recommend you save $17,500 of your hospital salary in your 457 plan and an additional $17,500 of your reservist salary in your Thrift Savings Plan.
Let’s move on to employer contributions which have their own limits. As the owner of a small business, you can also elect to make employer contributions to your individual 401(k). The limit for the combination of employer and employee contributions is $51,000 and falls under section 415(c) of the tax code. As long as your employers are unrelated, it is possible to have multiple 415(c) limits. This means that hospital contributions into your 457 plan and government contributions into your Thrift Savings Plan will not limit employer contributions to your Solo 401(k). These employer contributions are not aggregated which means you have three different employers each contribute up to $51,000 each towards your retirement.
To maximize your savings, you could have an additional $51,000 saved in your solo 401(k) plan and accounted for as an “employer contribution.” However, even if you have $51,000 to save, you may not qualify to make this large a contribution. Employer contributions are limited to 25% of net compensation, which means you would have to make over $204,000 of reportable income in your business before you could max out this contribution.
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