Doubling Retirement-Savings Plan Contributions

I’m about to start a new job, and my new employer says I can contribute to a 403(b) and a 457. Can I really contribute to both retirement plans, or do I need to pick one or the other? And what happens if I already contributed some money to my old employer’s 401(k) for 2014?

Under a special opportunity available to some public school teachers, health care workers, and other nonprofit and public sector employees, you can contribute up to $17,500 for the year to a 403(b), plus up to $17,500 to a 457. If you’re 50 or older in 2014, you can also make catch-up contributions and add an extra $5,500 to both plans. Longer-term employees also have other opportunities to make special catch-up contributions to 403(b)s and 457s; you can find details in this IRS publication.

If you already contributed some money to a 401(k) for the year, however, you’ll need to subtract that from your 403(b) limit. But you can still contribute the maximum to a 457, which isn’t affected by 403(b) or 401(k) contribution limits. For more information, see the IRS’s How Much Salary Can You Defer If You’re Eligible for More Than One Retirement Plan?

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When you switch jobs in the middle of the year, let your new employer know how much you already contributed to a retirement-savings plan for the year. If you later discover you’ve contributed too much, your employer must withdraw the excess money (you can’t do it yourself) and return it to you as a distribution. If your employer withdraws the extra contributions and earnings before April 15 of the following year (the tax-filing deadline), the extra contributions will be taxed for the year you made the contribution, but the earnings on it will be taxed in the year the excess money was distributed, says Jamie Ohl, president of tax-exempt markets for ING U.S. Retirement Solutions.

If the excess contributions and earnings are withdrawn after the tax-filing deadline, the contribution is subject to double taxation -- that is, it will be taxed in the year that it was deferred and again in the year it is distributed from the plan, says Ohl. Earnings on that money are taxed in the year they are distributed. See the IRS’s What Happens When an Employee Has Elective Deferrals in Excess of the Limits? for more information.

It’s a good idea to contribute the maximum to both the 457 and the 403(b) if you can afford to do so. In the past, public sector and nonprofit workers tended to use these retirement-savings plans just as a supplement to a generous pension. But many of their employers are cutting back on pensions and retiree health care coverage, so employees have to come up with more money on their own, says Ohl.