Understanding retirement plan rules can be complicated, especially when you contribute to both a 457(b) plan and a solo 401(k) in the same year.
It may be surprising, but if you are contributing to a solo 401(k) plan alongside a 457(b) plan at your job, you might face challenges in determining your maximum annual contributions for each plan.
This article shows you how contributions to these two structures can impact your overall funding. Let’s dive in!
Background
We work with individuals who contribute to various retirement plans. Therefore, it is common for us to handle clients who are contributing to multiple plans in a single year.
Many of our clients are physicians who work at a hospital during the day and take on locum tenens or independent contracting jobs on the side. In these situations, it is common for them to fully contribute to their 457 plan at the hospital while still seeking opportunities to invest in a 401(k) or utilize a Mega Backdoor Roth.
One of the key challenges that often arises when someone contributes to multiple plans is the process of combining them. While most defined contribution plans are governed by the same employee deferral and annual contribution limits, the actual combination can be a complex task.
Before we discuss the combination rules, let’s briefly discuss a 457(b) plan. We won’t discuss 401(k) rules because I’ll assume you understand them well.
What is a 457(b) Plan?
A 457 plan is a type of tax-advantaged savings plan designed for employees of state and local governments, as well as certain nonprofit organizations. It allows participants to contribute a portion of their pre-tax income into the plan, which helps reduce their current taxable income.
One unique feature of a 457 plan is its flexibility with withdrawals. Unlike other retirement plans, participants in a 457 plan can withdraw funds penalty-free upon leaving their job, regardless of their age. This can be particularly beneficial for individuals who may retire early or need access to their savings before reaching traditional retirement age.
However, the withdrawn funds are still subject to regular income tax. Contribution limits for 457 plans are similar to other retirement accounts, and participants over 50 may also take advantage of catch-up contributions to boost their savings.
Employee Deferral and Annual Contribution Limits
401(k)and 457 plans are both defined contribution plans. They even follow the same annual IRS contribution limits. These contributions fall under two limits:
- Employee deferral limits (see IRC 402(g))
- Annual contribution limits (see IRC 415(c))
The limits for 2024 are detailed in the table below:
| 2025 Contribution Limit | Amount |
|---|---|
| Deferral for under age 50 | $23,500 |
| Deferral for age 50+ (including catch-up) | $31,000 |
| Maximum for under age 50 | $70,000 |
| Maximum for age 50+ (including catch-up) | $77,500 |
Limits on Contributions to Multiple Plans
Let’s first discuss the general rule when it comes to combining multiple plans and then we can dive into 457 plans.
General Rule
Generally, if you contribute to multiple plans under separate control groups, you do not need to combine the annual contribution limits. This allows for overall higher contributions.
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However, you must generally aggregate elective deferrals made to multiple plans. The elective deferral is per person and per year. So, you cannot exceed the annual employee deferral limit when combining all plans.
The $70,000 annual addition limit applies separately to each “unaffiliated employer.” In other words, you have an additions limit for each control group.
This general rule provides a valuable advantage for small business owners. They can receive a safe harbor contribution and/or profit-sharing contribution from their employer while still maximizing their annual contribution limit to their solo 401(k) plan.
Actually, if you have multiple jobs, you can benefit from all these employer contributions without any restrictions. It’s a great opportunity!
457 Plan Rule
The good news is that even though the deferral limits are the same for both a 457(b) plan and a 401(k), contributions to a 457(b) plan are NOT combined with deferrals made to a 401(k) plan. You can see the IRS discussion on this issue here.
So, you can “double-up” on your contributions. Assuming you meet the minimum compensation, you may be able to defer:
| Under age 50 | $23,500 to each plan |
| Age 50+ | $31,000 to each plan if both plans allow age-50 catch-ups ($7,500 additional in 2025) |
Take a look at what the IRS says about 457(b) combination rules here.
Is a Cash Balance or Defined Benefit Plan Right For You?
457(b) and 401(k) Combination Example
A 42-year-old physician is employed by a non-profit university hospital. He makes a full $23,500 contribution to the hospital 457(b) plan.
The physician also has some self-employment income from working at a local clinic. This income is taxed as a sole proprietor. The net business profit on Schedule C of his 1040 personal tax return was $280,000.
Because the contributions to the 457(b) plan are NOT combined with deferrals made to a 401(k) plan, he is able to make the following contributions:
| Type | 457(b) | 401(k) | Total |
|---|---|---|---|
| Employee Deferral | $23,500 | $23,500 | $47,000 |
| Employer Contribution/After-Tax | $46,500 | $46,500 | $93,000 |
| Total | $70,000 | $70,000 | $140,000 |
Final Thoughts
Combining a 457(b) plan with a 401(k) plan can offer significant advantages for employees seeking to maximize retirement savings. Since contribution limits for each plan are separate, participants can contribute the maximum allowable amount to both, effectively doubling their annual savings potential.
Employers who offer both plans create a highly competitive benefits package, attracting and retaining top talent while supporting diverse financial goals. Employees gain the ability to diversify their tax strategies, as they can contribute pre-tax dollars to both plans or utilize Roth options where available.
By combining these plans, employers and employees can leverage the strengths of each to build a comprehensive, robust retirement strategy that accommodates both short-term needs and long-term financial security.
