Do 403(b) & 401(k) Limits Combine?

by Herb Kirchhoff

If you have multiple employer-sponsored, tax-deferred, defined-contribution retirement plans such as 401(k) and 403(b) programs, you must carefully monitor your contributions to avoid tax complications from excess contributions. The Internal Revenue Service (IRS) says its contribution limits apply on a combined basis to all such plans you have, not to each plan individually.

Amount of Limits

If you have a 403(b) plan from a public school, nonprofit organization or church, and a 401(k) plan from a private for-profit employer, your contributions to both plans are limited to the lesser of $16,500 annually or 100 percent of your pay. If you contributed $9,000 to your 403(b) account, you can only contribute $7,500 to your 401(k). The total additions to your accounts from both you and your employer are limited to the lesser of $49,000, or 100 percent of your salary. If you and your employer together contributed $30,000 to your 401(k), total employer and employee contributions to your 403(b) account can’t exceed $19,000.

Catch-Up Contributions

If you are an employee over age 50, you can make catch-up contributions above the $16,500 employee contribution limit. You can contribute up to an additional $5,500, for a total annual limit of $22,000. However, that higher limit applies on a combined basis to both your 401(k) and 403(b) plans, meaning you must divide your $5,500 in catch-up contributions between your two plans. Your additional elective contributions don’t count as catch-up contributions until your regular contributions exceed the $16,500 limit.

Excess Contributions

When managing multiple retirement accounts, it’s possible to end up contributing too much. You want to avoid excess contributions because they will be taxed twice. Contributions beyond the limit are not deductible so they are taxable in the current year. The money will be taxed again when you withdraw it from your account. You can withdraw excess contributions without penalty if you take them out before the due date of your income tax return.

Your Choice

You can choose whether all the excess contributions will come out of one account or if a portion of the excess will be withdrawn from each account. You must notify your plan administrator that you are making a corrective withdrawal of excess contributions and specify the amount you are taking out. The plan will also withdraw any earnings on your excess contributions, and send you a Form 1099-R showing the corrective withdrawal and the earnings on that money. You add the corrective withdrawal to your taxable income for the year. You also must report the earnings. You will pay income taxes plus the 10 percent early withdrawal penalty on the earnings.

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