Maximizing Retirement Plan Contributions

[scarabrad]

Folks,

Incredibly useful site. Would appreciate any input one can provide on my situation.

I am in a very fortunate situation of having two employment contracts with distinct employers and sizable self-employment income as well. I am prone to save as much as possible in retirement plans, mainly to achieve as much tax deferred investment as possible. Thus far, I have the following plans established:

1) Employer 1 (<100K income): 403B. I contribute the maximum (was 16,500, now 17,000) and my employer contributes ~20K (capped at this for my age group).

2) Employer 2: 401K, to start this upcoming July, 2012 after 1 year of service. I can contribute $17,000 to this with a full match to 49 or 50K (whatever the maximum is). I assume I will have to cease contributing to my 403B with my other employer so as not to exceed maximum employee contributions across plans.

3) Employer 2 also offers a 457B, to which I have not started contributing, but would like to. I assume I can make these contributions exclusive of the 403(b)/401K contributions (I will not be contributing to both the 403 and 401K starting July 1)? Is this assumption correct?

4) Self-employment: I have established a defined benefit plan for myself with target income of ~130K at age 62 and contributed ~100K for 2011. Actuarial assumptions not available for 2012.

5) I also contribute each year to a non-deductible traditional IRA for me and my homemaker wife, which I assume I can make.

Are my assumptions correct for the above scenario and am I taking maximum advantage of retirement plan contributions? Am I overlooking anything or in violation of any IRS rules? Any advice you sages can provided would be most appreciated.

Many thanks in advance!

SR

[Guest rex]

Folks,

Incredibly useful site. Would appreciate any input one can provide on my situation.

I am in a very fortunate situation of having two employment contracts with distinct employers and sizable self-employment income as well. I am prone to save as much as possible in retirement plans, mainly to achieve as much tax deferred investment as possible. Thus far, I have the following plans established:

1) Employer 1 (<100K income): 403B. I contribute the maximum (was 16,500, now 17,000) and my employer contributes ~20K (capped at this for my age group).

2) Employer 2: 401K, to start this upcoming July, 2012 after 1 year of service. I can contribute $17,000 to this with a full match to 49 or 50K (whatever the maximum is). I assume I will have to cease contributing to my 403B with my other employer so as not to exceed maximum employee contributions across plans.

3) Employer 2 also offers a 457B, to which I have not started contributing, but would like to. I assume I can make these contributions exclusive of the 403(b)/401K contributions (I will not be contributing to both the 403 and 401K starting July 1)? Is this assumption correct?

4) Self-employment: I have established a defined benefit plan for myself with target income of ~130K at age 62 and contributed ~100K for 2011. Actuarial assumptions not available for 2012.

5) I also contribute each year to a non-deductible traditional IRA for me and my homemaker wife, which I assume I can make.

Are my assumptions correct for the above scenario and am I taking maximum advantage of retirement plan contributions? Am I overlooking anything or in violation of any IRS rules? Any advice you sages can provided would be most appreciated.

Many thanks in advance!

SR

im not an expert but you didnt mention having your own company. You only mentioned two jobs both of which you are an employee. You cant just create a defined benefit plan unless you have a 3rd source of income and are not an employee. Only income from your "own company" could be used towards the defined benefit plan.

[Belgarath]

I don't know your health insurance situation, but possibly a Health Savings Account (HSA)? If you are in a High Deductible health plan, you may be able to take advantage of this as well. I have only a passing familiarity with these, but lots of folks on this board are undoubtedly experts.

[SoCalActuary]

The analysis looks correct. But the 403(b) is generally a better choice than the 401(k), because the two must be combined.

You should take advantage of the 457 plan as well, since it is not aggregated with either the 403b or 401k.

Good luck, and don't kill yourself from overwork.

[scarabrad]

Folks,

Incredibly useful site. Would appreciate any input one can provide on my situation.

I am in a very fortunate situation of having two employment contracts with distinct employers and sizable self-employment income as well. I am prone to save as much as possible in retirement plans, mainly to achieve as much tax deferred investment as possible. Thus far, I have the following plans established:

1) Employer 1 (<100K income): 403B. I contribute the maximum (was 16,500, now 17,000) and my employer contributes ~20K (capped at this for my age group).

2) Employer 2: 401K, to start this upcoming July, 2012 after 1 year of service. I can contribute $17,000 to this with a full match to 49 or 50K (whatever the maximum is). I assume I will have to cease contributing to my 403B with my other employer so as not to exceed maximum employee contributions across plans.

3) Employer 2 also offers a 457B, to which I have not started contributing, but would like to. I assume I can make these contributions exclusive of the 403(b)/401K contributions (I will not be contributing to both the 403 and 401K starting July 1)? Is this assumption correct?

4) Self-employment: I have established a defined benefit plan for myself with target income of ~130K at age 62 and contributed ~100K for 2011. Actuarial assumptions not available for 2012.

5) I also contribute each year to a non-deductible traditional IRA for me and my homemaker wife, which I assume I can make.

Are my assumptions correct for the above scenario and am I taking maximum advantage of retirement plan contributions? Am I overlooking anything or in violation of any IRS rules? Any advice you sages can provided would be most appreciated.

Many thanks in advance!

SR

im not an expert but you didnt mention having your own company. You only mentioned two jobs both of which you are an employee. You cant just create a defined benefit plan unless you have a 3rd source of income and are not an employee. Only income from your "own company" could be used towards the defined benefit plan.

Rex, I do have sizable self-employment income ($175,000 +/-) from consulting contracts and have my own sole-proprietorship tax ID and a tax ID for my defined benefit plan. Sorry if I did not make that clear.

SoCalActuary, thanks for the commentary. The 401K plan starting in July, 2012 actually provides full match to to the $49K (? now $50K) fully funded level set by the IRS, while the 403b comes up 9 or 10 thousand short because of the funding formula (you can't max out until you reach age 50). So, I think in July, I will jettison the 403b in favor of the 401K. I intend on starting the 457b now!

Belgarath, I do fund a flexible health savings account but am provided full health coverage by 1 of my employers, so the HSA doesn't apply here.

Any other comments are greatly appreciated. Because my situation, I think, is somewhat unique, I have not been able to get clear cut answers from most (Fidelity, my accountant, financial planners, etc). But this site has gotten me closer to an answer than any of the other sources I've tapped.

Thanks!

SR

[ESOP Guy]

Here is my two cents. While I really appreciate the idea you are so well informed. In fact I wish more of my client were as well informed as you. You need to get off the advice board and pay for advice in this case.

When someone pushes the limits like you it pays to have someone who knows your WHOLE situation review the facts. I might be telling you the obvious, but just in case I thought I would say it. But the excise taxes and penalties for over contributing to plans can become very expensive quickly. Getting advice from someone who knows the all the facts is cheap insurance in my mind.

If your CPA/tax person doesn’t feel qualified to handle all this qualified plan “stuff” talk to your actuary. He either he can help you or he will know someone who can handle this. You need someone who knows Defined Benefit and Defined Contribution limits and planning. (Since you are saying you can't find good advice I suspect there are TPAs on the board that could give you good advice for hire. Full Disclosure I am NOT one of those people as I don't know Defined Benefit Plans well enought so I have no self-interest in this comment.)

By the way one of the questions I would ask is if you can set up a Defined Contribution plan along with your Defined Benefit plan for your self-employed income. This can SOMETIMES be done, but there are limits to this kind of doubling up. I work with exactly one client who has a Defined Benefit Plan and a Safe Harbor 401(k) plan. But the 401(k) plan is very limited for the owner, but the contribution rate isn’t zero either.

[scarabrad]

ESOP Guy, with all due respect, I have grown frustrated trying to seek out this specific advice, particularly from those who are supposed to have answers. I have already spent a fairly sizable sum for actuarial support to establish my plan (yes, I know I can contribute 6% after DBP contributions, deductions and SE tax to a safe harbor 401K, but this will be a small amount relative to the amounts I have already sheltered in my DBP and can shelter in my employer sponsered 401K) and don't relish spending thousands more for scant additional advice. I have made myself informed through years of hard work seeking out this information and doing my own due diligence. I am very financially savvy and have managed my own investments for years, beating the market by 10% annualized over the past 5 years (+9.98% relative to -.18% on the S&P500 according to Fidelity...yes, even during the dark days of 2008 when I was up ~30%...that was a very good year, as other years I trail the market by several percentage points).

It is for this reason that I turned to this incredibly useful board, not necessarily to freeload, but to get a general sense as to whether I am proceeding correctly or whether it is indeed time to hire a financial planner. The problem is, most I have talked to have reviewed my plan and my performance and have little to add. When I applied to 4 different actuaries for assistance with my defined benefit plan, I got 4 wildly different responses including one stating that it would be of no benefit for me to start a plan!!! (and I managed to put $100K this year!).

Hope you understand my frustration and why I turn to this board. Do appreciate the input.

SR

[JAY21]

In my opinion as an actuary you are maximizing every opportunity currently available to you. I can think of no further options or different plan design that would increase what you are doing. Also it sounds like you are staying within the limits.

This is just my opinion based upon your current day snapshot of info you provided so you'll need to make sure you have professional help to "mind the store" on all the contribution limits going forward, but I see no problems or unmissed opportunities from the info you have provided.

[david rigby]

Are you interested in adopting me?

[tuni88]

... the 403(b) is generally a better choice than the 401(k), because the two must be combined ...

Could someone please explain what this means. Does it mean I can't contribute $22,500 to my 401k and $1 to my 403b?

[John Feldt ERPA CPC QPA]

The 402(g) limit is an individual limit. Assuming you are a taxpayer that is taxed on a calendar year basis, then your calendar year 402(g) limit for 2012 is $17,000 + $5,500 (if age 50) = $22,500.

By "contribute" I assume you mean "defer from wages".

Combine all of your 401(k) deferrals, SIMPLE 401(k) deferrals, and 403(b) deferrals together. Does the total exceed $22,500? If so, then you are over the limit.

the 457(b) limit is separate from this and not counted against the individual 402(g) limit, but it does combine all 457(b) annual "deferrals" together.

[Mike Preston]

scarabrad, you sound incredibly informed. While there is a part of me that wants you to post tips on what to invest in, I will avoid coming out and asking for that.

However, there are still a few areas of concern that I have about your situation.

First, you mention that the employers are all distinct. I would just caution you that "distinct" is not a technical term. If you can substitute "not aggregated under 414(b), © or (m)" for "distinct" then you will have obviated this concern. Can you? This should have been one of the very first things that any of your potential advisors determined on your behalf.

Second, there is something that bothers me about the fact that you say one actuary told you that it would be of no benefit for you to start a plan. Was he the most careful of the professionals you dealt with or the most cavalier? One can usually suss this out by a conversation or two. More importantly, did he tell you WHY he (or she) thought it would be of no benefit for you to start a plan? If the letter which explains that is not available, even a snippet of whatever conversation you had would go a long way toward addressing this concern.

Third, one of the not very well known parts of the law that may impact you is section 415(k)(4) of the Internal Revenue Code. That Code section says that your 403(b) is considered to be maintained by every employer you have "control" over. Certainly this includes your sole proprietorship (what you refer to as your self-employment). Hence, it appears, at first blush, that you would go through the motions for 2011 by considering your 403(b) and your defined benefit plan together. As you already point out, if the 403(b) plan wasn't in the picture, your sole proprietorship could establish a 401(k) (or, a profit sharing plan) to which you could fund an employer contribution of only 6% of pay. With the 403(b) plan in the picture, however, it is possible that you had contributed on your behalf the $20,000 you mentioned. If so, while I wouldn't necessarily agree that you could get "no benefit" from a defined benefit plan, it may have been necessary to scale back the ~100k a bit. If it is too late to scale 2011 back (since it is after the end of the year), you may find it necessary to deduct less than the full contribution to the defined benefit plan in 2011 and then put the balance in as the first dollars deducted in 2012. Note that this technique is not universally agreed upon so you would need to confirm with your advisors as to how to handle this circumstance, should it be relevant to you.

I note that you do not give your birth date or age (and I couldn't find it on your profile) or the history of your self-employment income so it is impossible to opine on the amount calculated on your behalf.

But if you have truly have gone to 4 different actuaries and received 4 wildly different responses you may have the documentation to make it a piece of cake for somebody to analyze their respective responses and tell you which of them have merit.

Good luck.