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|Contribute to both a 403(b) and a governmental 457(b)
How would you like to sock away $26,000 (or more) a year in tax-deferred money? Thanks to recent
passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), some educators
now have this opportunity.
Governmental 457(b) plans have traditionally covered state and local government employees, which included some teachers.
In the past, teachers who wished to contribute to both plans were limited to the total aggregate amount of the
457(b) which was only $8,500 at the time. Thanks to the new tax law (EGTRRA), however, teachers who are eligible for both plans can
now contribute the maximum ($13,000 per plan for year 2004) to each plan for a total contribution of $26,000 in 2004.
Participants eligible for "catch-up" provisions can contribute even more.
Governmental 457(b) plans contain a special "catch-up" provision called the "final three year" provision for those approaching retirement
(assuming they haven't contributed the maximum amount in prior years). This provision permits the smaller of (a) twice the regular dollar limit
($13,000 x 2 for 2004 for a total of $26,000) or (b) the under utilized limit in prior years. The under utilized limit is equal to the sum of (1)
the applicable limit for the current year ($13,000 for year 2004), plus (2) the amount by which the applicable limit in preceding years exceeded
the participant's actual deferral in those years, meaning the amount they failed to contribute to reach maximum. Thus the catch-up can be as little
as zero (if the person maxed out each year) or as much as two times the current limit. This "catch-up" provision may be utilized during the three
years prior to "normal" retirement age (as defined by the plan). Example: If a worker is to reach normal retirement age by 2009, he or she can take
advantage of the "final three year" provision in years 2006, 2007, and 2008. Those who qualify for the maximum under this provision can defer
$13,000 to the 403(b) + $26,000 to the 457(b) for a total deferral of $39,000.
Additionally, an "Age 50 catch up" provision allows anyone 50 or older to contribute an additional $3,000 (year 2004)
to the 403(b). This means a worker could conceivably make $42,000 in contributions during 2004 ($13,000
to the 403(b) + $3,000 to the 403(b) + $26,000 to the 457(b) = $42,000). Note: The 457(b) contains a similar
"Age 50 catch-up" provision. However, participants who take advantage of the "final three year" provision cannot also take
advantage of the "Age 50 catch-up" provision under the 457(b) plan.
But wait, there is even more. The 403(b) has its own additional catch-up provision called the "15-year rule." This special
"catch-up" provision allows participants to increase their annual contribution by $3,000 more than the current $13,000 limit
(as of 2004). To qualify workers must have completed at least 15 years of service with the same employer (years of service need
not be consecutive), and cannot have contributed more than an average of $5,000 in previous years. The amount contributed under
this provision cannot exceed the smaller of (a) $3,000 (b) $15,000 reduced by amounts already excluded (contributed) in prior years
under this rule, and (c) the excess of $5,000 times years of service over all prior elective deferrals. This latter limit may cause the increase
to be less than $3,000, but more than zero. A $15,000 lifetime maximum contribution to this catch-up (under current rules) is in effect.
Conceivably a worker could make a whopping $45,000 in contributions during 2004: ($13,000 to the 403(b) + $3,000 to the 403(b) + $3,000 to the
403(b) + $26,000 to the 457(b) = $45,000).
Note: The 415(c) limit of $40,000 has been indexed to $41,000 for 2004. It applies to employer and employee contributions to all defined contribution plans
maintained by the employer. It doesn't include 457 contributions. So, it would be possible for someone to contribute $45,000, just as long as contributions to the
403(b) don't exceed $41,000. For example, if an employer contributed more than $22,000, it would reduce the employee's ability to max out their $19,000
Note: "15-year rule" catch-up contributions are factored before the age 50 catch-up. For example, if someone
during 2004 is eligible for the full-load of 403(b) contributions and catch-ups of $19,000 ($13,000 + $3,000 + $3,000) and chooses to
contribute just $15,000 the extra $2,000 is applied to the $15,000 lifetime limit of the "15-year rule."
It is highly recommended that you consult a tax or investment professional before taking
advantage of any of these catch-up provisions.
What is a governmental 457(b) plan?
A governmental 457(b) plan is a nonqualified, deferred compensation plan established by state and local governments. In some cases,
employers that allow employees to participate in 403(b) plans also offer 457(b) plans.
When can I start a 457(b) plan?
Unfortunately most employers who offer 403(b) plans, and are eligible to offer 457(b) plans, don't. The good news is that many
employers are adding 457(b) plans. If your employer doesn't offer a 457(b) plan, lobby them to add one.
For more information on 457(b) plans see: 457(b)wise