Given the recent uptick in our income due to my new job and our growing self-employment income, I’ve recently been thinking of ways to reduce our 2007 tax liability. The first step, of course, is to contribute to my employer’s basic retirement plan, which is held at Fidelity. But… I want to do way more than that.
Thus, I opened a Vanguard SEP-IRA and have been making employer contributions to that on my own behalf (these contributions can be made in addition to traditional/Roth contributions – see here for a handy calculator). Another piece of the puzzle has been to open an optional 403(b) (also with Vanguard) and max out the $15,500 contribution limit.
This is all well and good, but I really, really, really hate paying taxes (don’t we all?), so I’d like to do even more. And then it hit me… In addition to the optional 403(b) plan, my employer offers an optional 457(b) plan. The contribution limits for both of these are listed at $15,500 for 2007, and I have always assumed that these two types of accounts share a common contribution limit (i.e., that your total contributions to both couldn’t exceed $15,500).
Guess what? I was wrong. Over the weekend I finally got around to looking into this, and here’s what I learned over at 457bwise.com:
The Economic Growth and Tax-Relief Reconciliation Act of 2001 (EGTRRA) repealed coordination of contributions between 457(b) plans and 403(b) plans [and 457(b) plans and 401(k) plans]. This means that employees with enough includable compensation can contribute the maximum elective deferral limit to both a 403(b) and a 457(b) [and a 457(b) and a 401(k)]. For 2007, this is $15,500 for a whopping total of $31,000. Participants eligible for catch-up provisions can include even more.
Holy cow! I can shield up to $31k from taxes using these two accounts! While I realize that not everyone is in such a favorable position with regard to the availability of such plans, and that not everyone could afford the contributions even if they were, I now have a new goal… Continue making the 5% contribution to my basic retirement account (this comes with a match of a little better than 8%), max out my SEP-IRA employer contributions (20% of net self-employment income), max out my 403(b), and max out my 457(b).
As I’ve noted previously, it’s looking like we’re not going to be eligible for a Roth or deductible traditional IRA contributions this year, so those are currently on the back burner. If we somehow manage to do all of this and still have money to spare, our next step will be to make non-deductible traditional IRA contributions. In case you haven’t heard, the income limits for traditional-to-Roth IRA conversions are scheduled to go away in 2010. Assuming that’s still the case when 2010 rolls around, we’ll be able to convert these funds into our Roth accounts, effectively allowing us to circumvent the contribution income limits.