TAX RULES FOR DIFFERENT TYPES OF WORKPLACE PLANS | Ed Slott and Company, LLC

TAX RULES FOR DIFFERENT TYPES OF WORKPLACE PLANS

By Ian Berger, JD
IRA Analyst
Follow Us on Twitter: 
@theslottreport


Most workplace retirement plans allowing elective deferrals fall into one of these varieties:

  • 401(k) plans for employees of private sector companies.
  • 403(b) plans for employees of tax-exempt employers, public schools and churches.
  • 457(b) plans for employees of state and local governments.

Although many of the tax rules governing these types of plans are the same, there are some important differences. (This article doesn’t cover the Thrift Savings Plan, for federal government workers and the military, or 457(b) “top-hat” plans for employees of tax-exempt employers.)


What’s the same?  These tax rules apply to all three types of plans:

  • Elective deferrals are limited (to $19,500 for 2020), but employees who are age 50 or older at the end of the year can make catch-up contributions (up to $6,500 for 2020).
  • Roth contributions may be offered.
  • Plan loans may be offered.
  • Hardship withdrawals may be offered (although the 457(b) hardship standards are stricter than the 401(k) and 403(b) standards).
  • Required minimum distributions (RMDs) are required, but the “still-working exception” may be used. That exception allows employees who do not own more than 5% of the company (after applying family aggregation rules) to defer RMDs until the year they separate from service or retire.
  • Rollovers of eligible distributions to IRAs or other plans must be offered. In addition, 20% of the distribution must be withheld for federal income taxes (and possibly an additional amount for state income taxes) for eligible distributions that are not directly rolled over.
  • Rollovers of eligible distributions from IRAs or other plans are permitted. However, 457(b) plans allowing incoming rollovers from IRAs or non-457(b) plans must hold them in separate accounts.
  • 401(k) and 403(b) plans have always been able to offer in-service distributions at age 59 ½ or older. Following a change made by a 2019 law, governmental 457(b) plans can now also offer age 59 ½ or older in-service distributions.


What’s different?  These tax rules apply differently:

  • While 401(k) and 403(b) plans can offer after-tax contributions, 457(b) plans cannot.
  • In determining RMDs, 403(b) plans can be aggregated, but 401(k) and 457(b) cannot be. RMDs for pre-1987 403(b) accounts can be delayed until age 75.
  • A 10% early distribution penalty applies to certain 401(k) or 403(b) distributions made before age 59 ½. The penalty does not apply to 457(b) distributions – except for certain distributions of non-457(b) plan rollovers.
  • Only 403(b) plans allow for a special catch-up contribution for employees with 15 or more years of service. Only 457(b) plans allow a special catch-up for the last three years before an employee’s normal retirement age.

 


Posted in:

Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to matt@irahelp.com for approval.

For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at matt@irahelp.com or (516) 536-8282 with any questions.

 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.