403b and SEP | Ed Slott and Company, LLC

403b and SEP

Can someone have a 403(b) where he is maxing out his personal contribution ($19.5K) and receiving $10K from the organization in match/non-elective as well as a SEP set-up with separate 1099 consulting income from his side job?

Yes, except that the SEP contribution will be limited to 27,500.  Because a 403b must be treated as the participant's plan the total of the 403b contributions and the SEP contribution cannot exceed the Sec 415c limit of 57,000.  (57000 less 403b 29,500 = 27,500). In other words, both plans are subject to a single 415c limit. This would not be the case if they had a 401k plan instead of the 403b.

  • If the individual's Roth MAGI prevents them from making direct Roth IRA contributions. They could make non-deductible traditional IRA contributions and do a Roth conversion. This is the so-called Backdoor Roth. In a year with any Roth conversion, any pre-tax balances in all traditional, SEP and SIMPLE IRAs account on 12/31 of that year are subject to to pro-rata taxation.
  • If the individual wished to use the Backdoor Roth, it would be advisible to have no SEP IRA balance on 12/31. This can be solved in different ways.
    • If this is for 2020 tax year contributions, the individual can adopt, maintain and make employer contributions to a one-participant 401k instead of a SEP IRA. A 401k does not cause pro-rata taxation of a Backdoor Roth, but is still subject to the 403b annual addition limitation desribed by Alan above.
    • If this is for 2019 tax year contributions, it is too late for the individual to adopt a one-participant 401k. The individual can adopt and make 2019 tax year contributions to a SEP IRA by this year's postponed tax filing deadline (07/15/20) including extensions (10/15/20). Then there are two options to rollover the SEP IRA by 12/31.
      • If the individual adopted a one-participant 401k that accepts IRA rollovers (not Vanguard). They could rollover the SEP IRA to the one-participant 401k.
      • If the individual's 403b accepts IRA rollovers, they could rollover the SEP IRA to the 403b
 

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