I have a tax-related question that I’ve been having trouble getting answered, so I thought I’d throw it out here in hopes that someone can provide any insight… Besides, I’ve searched high and low and haven’t been able to find an answer online, so if we can get this sorted out here, it’ll be available for others to stumble across. This question actually first came up in the comments to my article on how to prioritize your retirement contributions and I’ve been struggling with it ever since.
In short, I’ve been planning on making my required contributions to my employer’s defined contribution plan, maxing out both my optional 403(b) and 457(b), and also contributing to a SEP-IRA based on self-employment income. In response to this, a commenter named CPA1298 asked whether or not I’ll bump up against the $44,000 maximum annual retirement plan contribution limit. As I understand it, the limit that he’s asking about applies to “elective deferrals” in the form of both employer and employee contributions, and is defined in section 415(c) of the Internal Revenue Code (IRC), although it’s actually $45,000 (or 100% of pay, whichever is less) for 2007.
Anyway, I didn’t have a good answer to his question, so I started researching it…
For starters, let’s talk about a bit more about my retirement options:
1. My employer’s defined contribution plan. I had two retirement savings options when I started work — a defined benefit plan (a traditional pension) or a defined contribution plan (I chose the latter). In either case, I would be compelled to contribute 5% of my income to the plan of my choice, and my employer also makes additional contributions. This was a one-time, irrevocable decision that had to be made during my first 60 days on the job.
So how does the 415(c) limit apply to this plan?
As I noted above, my understanding is that this limit deals with elective deferrals (but I may be wrong). Since these contributions are compulsory, and made pursuant to a one-time, irrevocable decision, it seems to me that they should not count toward the limit (but I could, of course, be wrong).
2. My optional 403(b) plan. This account is a tax-deferred account much like a 401(k). I am free to contribute up to $15,500 in pre-tax funds in 2007. There is no employer match.
3. My optional 457(b) plan. This is likewise a tax-deferred retirement savings account. Again, I am free to contribute up to $15,500 in pre-tax funds to it in 2007, and I have confirmed that I can participate in both the 403(b) and the 457(b) up to the full amount (i.e., they don’t share a $15,500 limit, so I can defer taxes on up to $31,000 between them). Here again, there is no employer match.
So those are the options that I have at my disposal through my employer. As I’ve noted previously, however, I also have a decent amount of self-employment income from a sole proprietorship totally unrelated to my day job. Thi brings us to…
(4) My SEP-IRA. I can contribute 20% of my net self-employment income (less 1/2 of my self-employment taxes) to this account. Here again, it’s a tax deferred contribution.
As you can see, depending on how things work, I may or may not run into trouble with the 415(c) limit of $45,000. So that brings me to my main questions…
The most important thing for me right now is determining whether or not the 415(c) limit is applied on a per employer basis. If it is, then it seems that I should have two such limits — one for my day job and one for my self-employment. I have read articles suggesting that this is true (including one from TIAA-CREF, but nothing from the IRS themselves), and the IRC guidance also supports this notion, as they say in section 415(f) that plans of related employers must be aggregated when applying that section’s contribution limitations. The implication here seems to be that plans from different employers should not be aggregated.
The other issue relates to my job-related retirement plans… Am I correct in assuming that the defined contribution plan doesn’t count toward the limit since it’s not elective (or at least it doesn’t appear to be based on my understanding of the term ‘elective’)? If not, then I’m in the clear (assuming the SEP-IRA is subject to it’s own 415(c) limit). If so, then what about the 457(b)? The treatment of this sort of plan seems to be different, and I’ve seen claims that 457(b) plans don’t enter into other plan calculations.
Please not that I’m looking for a concrete answer, so if you disagree with me, please do your best to support your view with information from the IRS. Likewise, if you think I’m right, it would be great if you could point out why.
And before anyone suggests that I seek professional counsel, please note that I’ve already contacted our tax attorney about this. I have, however, yet to receive a clear answer on any of it.