Over-50 Catch-Up Contributions

For those who will reach age 50 before the year’s end, the limit on the amount you may contribute to a 403(b), 401(k), or 457 account increases by $6,000. This boosts the individual contribution limit from $18,500 to $24,500. 

General Breakdown of 401(k)s, 403(b)s, and 457 Plans 
When it comes to comparing 401(k)s, 403(b)s, and 457 plans, there are many similarities and few differences. The similarities include: 

• $18,500 contribution limit (2018);
• $6,000 over-50 catch-up contribution; 
• Risk of investing falls on employee; 
• Withdrawals taxed as ordinary income; and 
• Amounts deferred on a pre-tax basis. 

 The major differences include: 

• 403(b)s and 457s have additional catch-up deferrals, as discussed above; 

• 401(k)s are open to most employers, 403(b)s are open to tax-exempt and non-profit organizations, and 457s are open to state/local governments and some non-profit organizations; and  
• 457 plans may not be subject to early withdrawal penalties like 403(b)s and 401(k)s. 

Mingling Contributions Among 401(k)s, 403(b)s, and 457 Plans

If you have a 401(k) and a 403(b), the maximum amount you can contribute to both accounts combined is $18,500 (2018). If you have a combination of a 401(k) and/or a 403(b) paired with a 457 plan, the maximum you can contribute combined is $37,000: $18,500 to the 401(k) and/or 403(b) and $18,500 to the 457. Plus, you can make any catch-up contributions allowed. The money you save into each account should be in order of employer matching with the employer plan that matches you at the highest rate first, until the match is completely maximized; then the money should flow to the account with the second-best matching and so on until you have contributed your overall maximum contribution to all plans. 

457 Special Catch-Up Deferrals

Another catch-up tool available to 457 plan participants is the 457 special catch-up deferral. This allows plan participants who are three years away from attaining normal retirement age in their 457 plan to defer: 

• Twice the yearly limit on deferrals ($37,000 in 2018, which is two times the yearly maximum contribution of $18,500 in 2018) for the three years leading up to normal retirement age; or  

• The yearly limit on deferrals plus any amount allowed in prior years that you chose not to or could not contribute. Plans will keep an ongoing list of amounts you were allowed to defer in prior years, the amount you actually deferred, and any shortfall from those years. If you choose this option, they add up all your shortfall and allow you to contribute an amount equal to the shortfall over the next three years. 

For governmental 457 plans, this additional contribution cannot be paired with the over-50 catch-up, which makes it important to use the one that will provide you with the greatest benefit or largest contribution. 

SECTION 457 PLANS

These plans are primarily used by government employers. Government employers may have qualified plans for employees, except that they are not eligible to adopt 401(k) plans. And, only a very limited category of government employers (public schools) can adopt 403(b) plans. Thus, the opportunity to offer employees a plan of the salary savings type is very limited. Section 457 provides the only alternative in designing a salary savings arrangement for most government employers. Plans designed under this Code provision are not qualified plans; moreover the rules are in many cases very different from those. The rules were enacted by Congress primarily to forestall perceived abuses in retirement plans of government employers rather than to benefit government employees, so they are somewhat lacking in flexibility or generosity.

Eligible Employers

Section 457 applies to government employers and to employers that are exempt from federal income tax. However, these plans are not much used by private tax-exempt organizations because better alternatives such as 401(k) plans are available.

Limit on Amount

The amount deferred annually by an employee under these plans cannot exceed the lesser of $7,500 or one-third of the employee's taxable compensation, reduced by any salary reductions under a Section 403(b) plan or SIMPLE. The $7,500 limit is indexed for inflation (2000: $8,000). This ceiling can be increased in each of the last three years before normal retirement age, to the lesser of $15,000 or the regular ceiling plus the total amount of potential deferral that was not used in prior years. If an individual has more than one employer, the total deferred for all employers must not exceed these limits.

Other Rules

• Elections to defer compensation under Section 457 are made monthly, under an agreement entered into before the beginning of the month.

• For government employers, employee salary deferrals must be placed in a trust fund or custodial account. However, for private tax-exempt employers, the plan cannot be funded—all deferred compensation and income therefrom remains the property of the employer.

• Plan distributions cannot be made before separation from service or "unforeseeable emergency."

• Plan distributions must meet the minimum distribution rules of Section 401(a)(9) regarding beginning date (April 1 after age 70½ or retirement).

• A special incidental death benefit provision applies—the participant must expect to receive at least two-thirds of the total payout where there is a survivor annuity.

• Plan distributions are taxable in full when received. They are not eligible for five- or ten-year averaging and cannot be rolled over into an IRA.

• There are no specific coverage requirements—the plan can be offered to all employees, or any group of employees, even a single employee. However, for a tax-exempt organization (but not for a government organization) the participation, fiduciary, and other ERISA rules may apply.

If the state or local government employer or tax-exempt employer has a nonqualified deferred-compensation plan that does not comply with Section 457—for example, one that exceeds the limits—then it is treated for tax purposes as a funded plan, whether or not it is actually funded. This means that the deferred amount is includable in the participant's income when there is no substantial risk of forfeiture. This does, however, provide some opportunity for governments and tax-exempts to design plans for top executives above the $7,500 limit by including forfeiture provisions.