By Dr. Jim Dahle, WCI Founder
One of the greatest challenges of WCI is answering Speak Pipe (pre-recorded) questions on the podcast. While Megan Scott (podcast producer) and Wendel Topper (AV guru) spend many hours on a podcast episode, the only time I spend on it—at least for the Q&A-type episodes—is literally the time you hear me talking on the episode. Sometimes the questions left on the Speak Pipe are actually pretty challenging, especially when you don't know they're coming. That means I sometimes get them wrong, especially when they get way out into the weeds.
The 90-second Speak Pipe time limit sometimes also means that I don't have the complete information. I got one of these questions wrong recently (and was rapidly corrected as usual). I subsequently got the rest of the story from the person leaving the Speak Pipe question and thought it would make for an interesting blog post. You see, this doc has access to not one, not two, not three, but four separate 403(b)s, all of which offer a match. In addition, the doc has 1099 income for which he has started a solo 401(k).
I'd never met someone with three 403(b)s, much less four, especially when every one of them offers a match. But after diving into all the plan documents, this is what the doc has available to him.
403(b) #1 (Physician Group)
- Salary $200,000.
- Match 5% per 6% contributed for a maximum $10,000 employer match for a $12,500 employee contribution
403(b) #2 (State Medical School)
- Salary $125,000
- Match 10% per 5% contributed for a maximum of $12,500 employer match for a $6,250 employee contribution
403(b) #3 (VA)
- Salary $100,000
- Match 7% per 7% contributed for a maximum of $7,000 employer match for a $7,000 employee contribution
403(b) #4 (Hospital Call Pay)
- Salary $25,000
- Match 3% per 3% contributed for a maximum of $750 for an employee contribution of $750
It turns out that, unlike an IRA, there is no contribution limit. There is a deduction limit. So, the doc can contribute $26,000 to 403(b)s to get his entire match; he just can only deduct $22,500. Frankly, I'm not even sure the IRS is going to catch that given how 403(b) contributions result in lower income reported on the W-2. Thank you to tax guru spiritrider on the WCI Forum for pointing that out. Technically, that last $3,500 is going to be taxed twice. Once when you make it—and then again when it is withdrawn from the account. Maybe that's a $1,500 tax bill. But this doc got an extra $3,500 for that contribution. It'd be well worth overcontributing.
Interestingly enough, spiritrider also pointed out that excess Roth 403(b) contributions are also supposed to be taxed again when withdrawn, but the IRS doesn't actually have a mechanism to track or report those. Wink, wink. If one or more of those 403(b)s offers a Roth 403(b) option, I'd certainly use it—at least for that last $3,500.
In addition to all this W-2 income and 403(b)s, this doc also earns $50,000-$100,000 a year of 1099 income from expert witness and consulting work, and he is wondering about the merits of an individual (solo) 401(k). However, there is a quirky rule that applies only to 403(b)s and not 401(k)s. In 2024, you can max out two 401(k)s at $69,000 a piece so long as the employers are unrelated [the limit was $66,000 for those under 50 in 2023]. Many WCIers are in this situation with some W-2 income and some 1099 income. Two 401(k)s; two 415(c) limits.
However, if your employer offers you a 403(b) instead of a 401(k), your 403(b) and your solo 401(k) actually share the same 415(c) limit ($66,000 in 2023 and $69,000 in 2024). In this particular doctor's case, all four of his 403(b)s AND his solo 401(k) share one limit. That means if he contributes $26,000 into his 403(b)s and his employers match $32,250 into the 403(b)s, that's a total of $58,250, leaving only $7,750 ($66,000 – $58,250 for 2023) he can contribute to the solo 401(k) as an employer contribution (or an after-tax/Mega Backdoor Roth IRA contribution).
This physician's family situation becomes even more fun because his wife works and she has a 403(b) as well, And that state medical school job? That offers a 457(b). And they both have Backdoor Roth IRAs. That's nine active retirement accounts to which they contribute each year. And I thought we had a lot with six.
What do you think? Do you have multiple 403(b)s? What's the most you've ever heard of someone having? How many retirement accounts are you actively contributing to each year?
Dr. Dahle,
Rather than pay taxes twice on the $3500 excess contribution, why wouldn’t you request a corrective distribution prior by the business day prior to the due date of your tax return? Assuming that you are vested, you would keep the match and not have to ever pay the second $1500 tax on the amount contributed. This is not uncommon and most plan administrators seem very cooperative with these requests. And you would only need one of the four plans to agree to the request. Fidelity even has a form for this:
https://nb.fidelity.com/bin-public/070_NB_PreLogin_Pages/documents/ReturnofExcessContributions_598550.pdf
Also, why wouldn’t the IRS catch the overcontribution? The MD in the scenario would have four W2’s (one from each employer) with a single social security number. Each W2 will have the amount of the pretax 403b contribution for each employer coded on box 12 (code E). All the IRS has to do is add the 403b contributions up and determine whether they are over the $22500 limit. Even my cheesy off the shelf tax software does this and automatically adds any excess contributions to income (since they are taken off reported income in box 1).
Even if you mix pretax and Roth 403b contributions, each will be reported on your W2s (codes E and BB on box 12) and can be summed to see if you exceeded the 402g limit. In a combination of Roth and pretax 403b contributions exceeding the limit, I am not certain how the IRS would handle this; but, if I were them I would require the pretax excess amount to be treated as additional income first and not the Roth contribution.
Now, if you did only Roth contributions, I agree that as far as I know, there is not an effective way for the IRS to track it. But, this may not be optimal if you have 4 incomes and are in a high tax bracket.
# 1 You think an employer isn’t going to clawback the match if you reverse the contribution? Seems like a great employer!
# 2 There’s no limit on contributions, only how much of that contribution is deductible. There’s nothing to catch.
Are we sure there’s no catch to any of this? I’m specifically curious with regards to mixing Pretax & Roth 403b contributions. Seems pretty straight forward (and a good deal for the government to get a double tax fee for going over on Pretax Money) but going over with Roth Money seems much more in the grey area.
Best I can find with regards to Government Rules is in IRS Publication 525 Page 11
(https://www.irs.gov/pub/irs-pdf/p525.pdf):
“Excess not distributed:
If you don’t take out the excess amount, you can’t include it in the cost of the contract even though you included it in your income. Therefore, you’re taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution (unless the excess deferral was a designated Roth contribution).”
The “unless the excess deferral was a designated Roth contribution” is wholly unclear & makes it seem like the IRS & politicians didn’t address a what should actually be done in this case.
Further searching landed me on the IRS 403(b) plan Fix-it Guide (for custodians) and the call the “over-contribution” a “mistake” in multiple areas on the page leading me to believe the spirt of the law is against this. Further down talks about:
“Excess deferrals not timely removed from the plan by April 15 of the year following the deferral may cause all of the 403(b) contracts held by an affected participant to lose their 403(b) status. Plan sponsors who didn’t timely distribute the excess deferrals may use EPCRS to avoid this. These mistakes are correctible by distributing the excess deferral to the employee as a taxable amount. The timing of the return of the excess to the participant decides how and when that refund is taxed. An excess deferral returned after April 15, following the calendar year of the deferral is subject to double taxation.”
It also states “the law requires that a 403(b) contract or custodial account may not exceed the current calendar year’s 402(g) limit.” and Potential for “all of the 403(b) contracts held by an affected participant to lose their 403(b) status” seems like a very bad thing if excess deferrals not timely removed.
It also seems very clear that with multiple plans, this falls to be the individual’s responsibility to report (and by the spirit of the law, correct). “If the employee participates in a 401(k) plan sponsored by an unrelated employer and this information is not shared with the 403(b) sponsor, the aggregate contributions to both plans must comply with the 402(g) limit and the employee has responsibility to communicate this to both employers. ”
https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide-your-403b-plan-didnt-limit-elective-deferrals-including-catch-up-and-designated-roth-contributions-to-the-amounts-specified-under-the-law-in-a-calendar-year
Maybe this page is not totally applicable & blogs are not good for official lawyer/accountant tax advise, and I’m not sure anyone would know the true ramifications/end result of this overcontributing plan until something like this went before a judge, but it doesn’t seem as benign & without a catch as its being made out to be. Would love to get more information/thoughts on this.
I’m really not clear on what you are asking. Are you referring to my comment above, the one I was replying to, or the blog post itself? What is your question exactly?
You seem to be talking about “mixing pretax and Roth contributions.” Employee contributions to most 403(b)s can be made pretax or Roth or any combination thereof.
Maybe you’re referring to this section of the post:
Interestingly enough, spiritrider also pointed out that excess Roth 403(b) contributions are also supposed to be taxed again when withdrawn, but the IRS doesn’t actually have a mechanism to track or report those. Wink, wink. If one or more of those 403(b)s offers a Roth 403(b) option, I’d certainly use it—at least for that last $3,500.
Pub 525 page 11 is confusing for sure. The section you quote from is the Excess Deferrals section that starts out saying “If you deferrals exceed the limit” but I can’t tell for the life of me what limit they’re referring to. I’m guessing from the next couple of sentences that they’re talking about the 402(g) limit but I’m not sure that’s true. It also says: ” If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions.” but doesn’t say you have to.
Your second link just seems to be talking putting more than the contribution limit into a single plan which isn’t what this post is discussing at all.
You might try asking spiritrider on the WCI Forum for his opinion on those publications and how they relate to the question at hand.
I was referring to the comment:
“There’s nothing to catch.”
And the whole concept of going above the total $23,000 employee contribution “limit” with Roth Money on purpose. I’m wondering if it’s truly as benign as you make it out to be or if it’s a loophole that exists but that breaks the “spirit of the law” and is asking for an audit.
I agree Pub 525 is confusing and it does seem the rules are unclear especially with regards to contributing to multiple Roth 403b accounts and ending up above the $23,000.
I took “If you deferrals exceed the limit” as referring to exceeding the $23,000 402(g) limit. But I agree, maybe it’s not what they’re referring to?
They do clearly say, you don’t have to have the excess paid out, but the way I read all of that is, they’re assuming anyone over contributing is doing it by mistake & if you discover your mistake after the April 15th deadline & your only option is to have an early distribution which will incur 10% early distribution penalty, then “you don’t have to pay out” you can just take the double taxation “penalty.”
The “unless the excess deferral was a designated Roth contribution” just makes everything even more murky. So you over contribute with Roth money.. then what? I agree with what spiritrider stated, it seems over contributing Roth basically won’t be tracked, but does the IRS truly not care?
Yes the second link is primarily aimed at employers preventing employees from accidently over contributing but what stood out to me was the following paragraph:
“Employers must understand that they have a responsibility to limit deferrals to the plan and to issue correct W-2s. Many organizations rely on vendors to limit the deferrals; however, the vendor may only have knowledge of a portion of the participant’s deferrals. Review your practices and procedures to help eliminate these mistakes. Establish procedures with your plan vendors to help identify these problems. These mistakes may affect the participants’ tax liabilities, so it’s also a good idea to educate participants. If an employee participates in the 403(b) plan and a 401(k) plan sponsored by the same employer, the total of all 403(b) and 401(k) deferrals made to both plans is limited to the single 402(g) limit. However, if the employee participates in a 401(k) plan sponsored by an unrelated employer and this information is not shared with the 403(b) sponsor, the aggregate contributions to both plans must comply with the 402(g) limit and the employee has responsibility to communicate this to both employers.”
To me this paragraph is outlining that it’s both employer and employee responsibility to comply with the 402(g) limit and it seems they’re implying due diligence should be taken to not go over.
So would over contributing on purpose raise red flags? Maybe all the IRS cares about is the limit on what is deducted and by the letter of the law this doctor this post is about contributing $26,000 is very much the right advice to follow. It just kind of seems wrong? I don’t know.
I guess thought another way, contributing extra after tax Roth dollars over the $23,000 limit in the end kind of results in the same thing a Mega Backdoor in plan conversion accomplishes (if I understand that correctly), and the tax code allows that as long as you’re below the 415(c) limit so maybe they really don’t truly care as long as the money is taxed somewhere.
It’s a super niche topic obviously. Personally, I don’t think I would overcontribute. I’d just invest in taxable. But I am curious what spiritrider would make of what you found in that publication. He probably has a good answer fr you.
Thanks for pointing out the quirk of contributions to a 403(b) plan and solo 401(k) counting toward the same 415(c) limit. What about contributions to a 457(b) plan and solo 401(k). Same or different limits?
457b and 457f plans are deferred compensation plans, whereas 401k and 403b plans are defined contribution plans.
Thus, separate limits.
This logic continues …. cash balance plans are defined benefit plans. Separate (actuarially derived) limit.
Different. More info here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Fascinating post, thanks! I was in a similar-ish spot last year with a 401a, two Roth 403bs, two 401ks (one solo), and a roth government 457. Assumed there was a common limit between the 403bs and 401ks and glad I did. Wish I still had those Roth 403b jobs now or had this info earlier about not being able to track contributions! Probably wouldn’t have even bothered with the solo 401k in that case until leaving the 403b jobs.
It looks like on my W2s in box 12 there is a tracking code for Roth 403b contributions “BB” that is reported to the IRS. I wonder what Spiritrider is referring to about not being able to track it?
Would that also fit in with Traditional TSP and Roth TSP? Could one contribute over the limit? Especially for those who are reservist or drill status guardsman.
What do you mean by contribute over the limit?
As a guardsman, I have a salary from my civilian that I max out, 403b, and 457b. Can I invest with TSP Roth/traditional? I was told no.
Why not? Have you read this?
https://www.whitecoatinvestor.com/multiple-401k-rules/
Thank you so much for pointing out this nuance! I’m headed back to fellowship after a few years as an attending, and I decided to max out my (pre-tax) 403B contributions in the first half of the year believing that I’d need 6 months before I was eligible for a retirement plan at my new institution. In a happy turn of events, new hires are immediately eligible for a 403B with 100% matching up to a certain percentage. Spent a few hours bummed that I’d be leaving money on the table, then remembered this post. I will happily accept the tax hit to get the full match. Thanks!
I know with multiple 401(k)s, one from employer A and another from employer B, you can contribute up to 69k each (2024 limit) for a total of potentially 138k in retirement accounts.
Does the same logic apply if you have multiple 403(b)s? For example, consider the scenario below:
Employer A: pretax 403(b) deferral: 23k, employer match: 10k, mega backdoor: 36k => 69 in employer A
Employer B: pretax 403(b) deferral = 0, employer match: 0, mega backdoor: 69k => 69k in employer B
Multiple 401k rules can be found here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
Pay special attention to rule 7.
My interpretation is that all 403(b)s are considered to share the same $69K limit with your solo 401(k).
Thanks for the reply! If I held two 403(b)s from unrelated employers, what would be the consequence (if any, ie taxed twice? Penalty?) if I performed the actions in the scenario below?
So basically for Employer A, I’m maxing out pretax 403b deferral and doing rest as a after-tax mega backdoor roth; and for Employer B I’m not putting anything in pretax or getting the match, and doing a straight $69,000 as a after tax mega backdoor roth (I verified with HR of Employer B that doing a straight $69,000 after tax mega backdoor is allowable, as I know some companies require you to max out the pretax/roth $23k before you can do the after tax mega backdoor)
– Employer A: pretax 403(b) deferral: 23k, employer match: 10k, mega backdoor: 36k => 69 in employer A
– Employer B: pretax 403(b) deferral = 0, employer match: 0, mega backdoor: 69k => 69k in employer B
Hello, I have a question related to this thread. I have three 403bs this year since I graduated residency and have one from my residency and two from my new employer. I am trying to figure out the maximum roth contribution I can contribute to avoid being taxed twice. I think it is either option 1 or 2 below.
Option 1:
Remaining contribution from me = $23k – (contribution at prior job) – (my contribution to new plan)
This comes out to around $8k.
Option 2: This is what HR told me but it does not make sense to me.
Remaining contribution from me = $69k- (contribution at prior job) – (combined contribution of my employer match and my contribution to new plan)
This comes out to around $44k.
In option 2, I would exceed $23k by a lot with my personal contribution (44k-23k= $21k excess), but I would not exceed $69k total. I am confused because I assumed option 1 was the right way, but HR told me differently. Although HR is not a tax expert, they inform people about the 403 b options.
Based on the very helpful thread above, it seems like I can contribute what I want, but I do not want to be taxed twice on $21k! I also would like to max out what I can for the tax benefits. Any help will be appreciated!
I don’t think the HR person knows what they’re talking about.
Now, if you do that are you likely to get caught? No, you’re not. But the rules are what they are. You can review them here:
https://www.whitecoatinvestor.com/multiple-401k-rules/
It’s a little odd that a single employer is offering you TWO 403(b)s. Are you sure about that?
Thank you much! This is very helpful. Yes my employer offers a pre-tax 403b plan that they match, and they also let me participate in a separate 403b that can be either pre-tax or Roth. Thank you for clarifying the rules that the individual limit of 23k still stands in addition the combined employee+employer limit of 69k.