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Academic 403b and 401a Irrevocable Help

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  • Academic 403b and 401a Irrevocable Help

    WCI Forum,

    Thank you all for your time and advice on this forum--I have learned a great deal from your input.

     

    I'm starting a new position with a university and they have been sending me information on benefit enrollment plans. Two plans really stand out--they have a 403b and 401a irrevocable pretax plans that both allow up to $53,000 in pretax money. The irrevocable aspect means I have to declare how much to contribute to the plan before my first day of employment and then I am locked into that amount until I retire--I cannot change it at any time. These sound like great options to potentially put away $106,000 in pretax money, however, I have not seen plans that allow this much--they are typically capped at $18,000. I'm a little concerned about locking up that much money in an irrevocable account, but it does seem like a nice option for tax reduction.

     

    Does anyone have experience with these plans and would you recommend them for tax purposes?

     

    The university also has two other pretax plans that allow flexible contributions up to 18,000 each. Therefore, the university potentially allows for $142,000 pretax options. I've been trying to max out my backdoor Roth IRA contributions as well as an after tax strategy. Clearly my portfolio would be weight to pretax contributions under the university options, but I think that would be better for a surgical specialty. Any thoughts would be appreciated--Thank you very much for your time and consideration!

  • #2
    Assuming the two additional pre-tax plans are a 457b and 401k plans, here are what I believe your options are.

    The irrevocable election is only to the 401a plan. These become what are known as "mandatory contributions" and do not interfere with the $18K employee elective deferral limit. Although voluntary elective deferrals would if allowed. Employee after-tax and employer contributions would be included in the annual addition limit $54K.

    403b plan employee deferrals are included in the employee deferral limit. However, the 403b is considered controlled by the participant and in not aggregated with with other plans of the employer for the $54K annual addition limit. However, they would be aggregated with any one-participant retirement plans of the employee.

    457b plan is a non-qualified plan and is not included in any limits of qualified plans.

    401k plan employee deferrals are included in the employee deferral limit. 401k plan annual limit is not aggregated with 403b plan.

    The employee deferral limit will apply to all employee elective deferrals across all plans except the 457b. Best maximum employee deferral option; $18K -> 457b, other $18K allocation to whatever combination gets the best match, investment options or annual limits.

    Just because there is a maximum total limit within a particular plan, does not mean you can reach that limit. Depending on the plan it requires a combination of mandatory contributions, employee elective deferrals, employee after-tax contributions, employer mandatory contributions, employer non-elective contributions, and employer matches.

    I would select the largest irrevocable mandatory contribution possible. It provides the least restriction to other contributions and those are all controllable. Then I would select other options for the maximum qualified employee elective deferral $18K combined with the maximum employer contributions. Then if available make voluntary employee-after tax contributions if allowed to plans with either In-plan Roth Rollover (IRR) or if in-service rollovers are permitted, rollovers to Roth IRAs. Investment options might also impact some choices of retirement plan options.

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