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retirement plan

The Two Types of 457(b) Plans

Some of you are aware that there are two types of section 457(b) retirement plans – governmental plans for state and local municipal workers, and “top hat” plans for highly-paid and managerial employees of tax-exempt employers like hospitals. What you may not know is that the two types of plans are different in several important ways.

SECURE 2.0 Allows Retroactive Solo 401(k) Plans with Elective Deferrals

The new SECURE 2.0 law fixes a glitch that has made it difficult for new solo 401(k) plans to be opened up retroactively for a prior year. A solo 401(k) plan is a great retirement savings vehicle for self-employed business owners with no employees (other than their spouse). In a solo 401(k), the sole proprietor (or other business owner) is considered to wear two hats – as an employee and as an employer. This allows both elective deferrals and employer contributions. The 2023 elective deferral limit is $22,500, or $30,000 if age 50 or older, while the employer contributions maximum is 20% of adjusted net earnings (or 25% of compensation if the business is incorporated). There’s also an overall limit for combined deferrals and employer contributions; in 2023, it’s $66,000 or $73,500 if the $7,500 age-50-or-older deferrals are made.

How the IRS Contribution Limits Work When You’re in Two Plans

How much can you contribute when you’re in two different retirement plans at the same time or at different times in the same year (e.g., after changing jobs)? The answer is complicated because there’re actually two different contribution limits – the “elective deferral limit” and the “overall contribution limit.”

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