Minimizing Our Taxes with a SEP-IRA, 403(b) and 457(b)

Given the recent uptick in our income due to my new job and our growing self-employment income, I’ve recently been thinking of ways to reduce our 2007 tax liability. The first step, of course, is to contribute to my employer’s basic retirement plan, which is held at Fidelity. But… I want to do way more than that.

Thus, I opened a Vanguard SEP-IRA and have been making employer contributions to that on my own behalf (these contributions can be made in addition to traditional/Roth contributions – see here for a handy calculator). Another piece of the puzzle has been to open an optional 403(b) (also with Vanguard) and max out the $15, 500 contribution limit.

This is all well and good, but I really, really, really hate paying taxes (don’t we all?), so I’d like to do even more. And then it hit me… In addition to the optional 403(b) plan, my employer offers an optional 457(b) plan. The contribution limits for both of these are listed at $15, 500 for 2007, and I have always assumed that these two types of accounts share a common contribution limit (i.e., that your total contributions to both couldn’t exceed $15, 500).

Guess what? I was wrong. Over the weekend I finally got around to looking into this, and here’s what I learned over at

The Economic Growth and Tax-Relief Reconciliation Act of 2001 (EGTRRA) repealed coordination of contributions between 457(b) plans and 403(b) plans [and 457(b) plans and 401(k) plans]. This means that employees with enough includable compensation can contribute the maximum elective deferral limit to both a 403(b) and a 457(b) [and a 457(b) and a 401(k)]. For 2007, this is $15, 500 for a whopping total of $31, 000. Participants eligible for catch-up provisions can include even more.

Holy cow! I can shield up to $31k from taxes using these two accounts! While I realize that not everyone is in such a favorable position with regard to the availability of such plans, and that not everyone could afford the contributions even if they were, I now have a new goal… Continue making the 5% contribution to my basic retirement account (this comes with a match of a little better than 8%), max out my SEP-IRA employer contributions (20% of net self-employment income), max out my 403(b), and max out my 457(b).

As I’ve noted previously, it’s looking like we’re not going to be eligible for a Roth or deductible traditional IRA contributions this year, so those are currently on the back burner. If we somehow manage to do all of this and still have money to spare, our next step will be to make non-deductible traditional IRA contributions. In case you haven’t heard, the income limits for traditional-to-Roth IRA conversions are scheduled to go away in 2010. Assuming that’s still the case when 2010 rolls around, we’ll be able to convert these funds into our Roth accounts, effectively allowing us to circumvent the contribution income limits.

16 Responses to “Minimizing Our Taxes with a SEP-IRA, 403(b) and 457(b)”

  1. Anonymous

    Boy… you guys are all more savvy than I am. You talk in a language I can only envy. Hope you’ll be patient while I try to decode all this and apply it to my own situation. Here it is:

    I’m self employed and also have a SEP. It’s just been a year and change so far, but I maxed it out in 2007 with a $46K contribution. And will do the same this year.

    I’m above the limit for a Roth or Traditional IRA, but read today about a technique for opening a non-deductible IRA… then rolling that into a Roth in 2010. And each subsequent year, doing the same (I know that I’ll have to pay tax on any earnings in the non-deductible IRA when I do the rollovers).

    So… questions:

    1) Can I contribute the max to my SEP and also contribute to a non-deductible IRA… or do those two also go toward the same contribution limit?

    2) If yes, how much can I contribute to the non-deductible IRA in addition? And how much of that can I then convert each year to the Roth IRA?

    3) What’s the story with a 403(b) (can I participate in one, as someone else-employed, for instance?)

    4) What’s the story with a 457 plan and how does that interact with any of the above?

    5) I’m afraid I forget the name of the plan for setting aside your kids’ college money, tax-deferred. But I wanted to know if any of you did that… or also did an HSA… or both combined,as well.

    6) Total, how much would someone be able to put aside before taxes, using the best possible contribution limits in the above combination?


    Thanks in advance!

  2. Anonymous


    I’m a noob and this is my first post so please be kind 🙂 I work for the government and currently max out my TSP for the $15,500. My first question is can I still contribute to either a 403(b) and/or 457 and have it lower my taxes? My AGI for this year (married filing jointly) is $164,316.

    My second question (maybe for a different forum?) is a complicated one (at least for me) I started a ROTH in 2006 and funded it with $4000. I then continued funding it in 2007 for $4000 and just put $5000 in for 2008. Well low and behold I make too much money for a Roth (something the Vanguard Salesperson neglected to inform me of) Now I’m trying to do the taxes with the Turbo Tax and it talks about penalties and recharacterization, etc. My AGI for 2006 was 151,982 and for 2007 as listed above was 164,316. Is there any auto calculators to tell me what I need to move out to a Traditional IRA. I don’t quite get the phase out things.

    Any help would be greatly appreciated. Thank You.

  3. Anonymous

    That’s cool. My wife is a teacher and has these two options. Her contributions are limited by her school district though, so we’ll only be able to contribute 30% of her income to the 403b, but may put some more in the 457. Thanks for sharing.

  4. Anonymous

    Nickel —

    A quick follow-up: I too am no tax professional, but I have also looked into the “is my self-employed sep-ira aggregated with my employer-sponsored 403(b) for 415 purposes” question. I believe that my view (and apparently yours) is correct, but I am thrown off by the contrary views of a number of CPAs and other tax professionals. Many say that because I am not in control of my employer, my employer’s 403(b) plan is not aggregated with my SEP. That seems flat wrong based on the IRS regulations (although interestingly it would be correct if we were talking about a SEP-IRA and an employer-sponsored 401K – I have no idea why there is a difference between a 403(b) and a 401(k) in this situation, but there seems to be).

    At any rate, I know you have another thread devoted to this, but it would be useful to get some “tax professionals” to weigh in on this question (useful, perhaps, only to me?). I’d be happy to share some citations to back up my view if anyone is interested.

  5. Professor: As far as I can tell, you are correct. I’m not a tax pro, but I’ve done a lot of digging and it appears that 403(b) accounts are treated as if they’re affiliated with a business that you (the individual) owns. As such, they are aggregated with the SEP for purposes of the 415 limit. So… I have two limits (one for work, one for self-employment) but the 403(b) falls under the self-employment limit, meaning that I can do a max of $29,500 in the SEP for 2007 given that I’ve maxed the 403(b) at $15,500.

  6. Anonymous

    Nickel —

    As one of your other threads discusses, I think you need to watch out for the 415 limit of 45,000 on aggregate contributions to your 403(b) plans and your SEP-IRA. I believe that contributions to a 403(b) plan (both employer and employee contributions) and your SEP will be aggregated for 415 purposes. I would love for someone to prove me wrong, but the IRS regs seem to back it up.

  7. David: Thanks for sharing your thoughts. We’re actually beyond the Roth IRA income limits, and also don’t have a Roth 401(k) as an option. As for the AMT, it’ll be close. Part of the reason I’m stashing so much away is to avoid triggering the AMT or, if we do, to minimize the hit.

    You’re correct that, as the laws are currently written, we’ll be paying future taxes as if everything coming out of these accounts was earned income. I’ve debated about focusing on tax efficient investing outside of these accounts, but it’s awfully hard to turn down a 33% tax break (plus state, which adds another 6% or so) today when you don’t have crystal ball to see what tomorrow holds.

  8. Anonymous

    I’m not so sure maxing out the other categories is the right thing to do, nickel. First, I suspect that tax rates will be higher for you when you’re retired than they are today. Second, at least under current tax laws the withdrawals are subject to full taxation at your highest bracket amount, where if you pay the taxes and invest in just about anything but a money market fund, the capital gains tax rate is only 15%. The two caveats are that tax you pay now are paid in 2007 dollars, while taxes paid later are paid in inflated dollars (if my suspicions are correct, VERY inflated dollars). So I agree with you about maxing out the Roth, but if your employer offers a “Roth 401k,” unless you’re already close to retirement age you’re probably better off in it than doing the tax-deferred one, and I suspect you’re better off investing outside of the tax-sheltered plan once you’ve maxed out your Roth contributions. The one exception is if your income is high enough to hit the AMT — in that case, you definitely want to shelter enough of your income to avoid that $%#^ tax!
    — Dave K.

  9. Anonymous

    Watch out for the 2010 Roth (no income limit conversion). You can’t have your cake and eat it too!

    By this I mean, you cannot just convert your nondeductible portion of your IRA and not expect to pay taxes on it. The IRS knows this and has put in a provision a long time ago (before the 2006 tax law that was passed by Congress).

    Say you have a total of 100K in IRA (SEP, 401k, nondeductible IRA, etc). Say you have 20K in nondeductible IRA and the other 80K in deductible IRA’s). You cannot just tell the IRS that you only want to convert the 20K that is in the nondeductible IRA. They will not allow it. Thus if you want to convert 20K, you will have to pay a percentage (in this case 16K of the 20K will be considered normal taxable income while the 4K will be considered nontaxable income (4K of 20K is 20%).

    Now if you were to convert 100% of your entire IRA profolio, than this will not be an issue. You pay taxes on the 80K and the other 20K will not be taxes. Just look for the IRS laws for Roth Conversions.

  10. Anonymous

    I’ve found that even some investment gurus (“advisers” “professionals”) don’t know that you can double-fund the 401k/457s. When we explained what we were doing, one firm was incredulous, but called us after doing their homework and said it was true. We can’t afford to fully fund both, but manage to contribute to both. We are still under the IRA contribution guidelines, so we do that, too.

  11. Interesting idea, NCN. Unfortunately, there’s no way I can pull that off. It would be nice, though, because I would have one less account to keep track of (i.e., a bigger 403 instead of adding the 457).

  12. Anonymous

    I “think” that if you could get your employer to agree, you can actually put even more money into your 403b… I snatched this text from 403bwise

    for those with employer matches or other employer contributions, limits are $45,000 or 100% of compensation (whichever is less). Note: the employee is still limited to the employee elective deferral limit ($15,500 for 2007). An employer can add up to another $29,500

    If you could get your employer to change your pay structure, they could contribute an additional 29.5 for you…
    I know that some of my minister friends do this… they contribute up to the max, and then their church does another part…
    there are some different rules for withdrawing and using money that “you” contribute vs. money your employer contributes…
    you might want to check into this…

    (btw, have you seen the latest update on our “battle to the death”… wow, it’s like down to the wire…)

    (one more btw… way to go with the awesome savings! you rock!)

  13. Jesse: No, we don’t have access to a 401(k) of any sort. Instead, I get matching funds into my ‘regular’ defined contribution plan (held at Fidelity) — not sure what it’s officially called in terms of IRS numbers, but I stash 5% there and got close to 8.5% in matching funds. The 403 (@ Vanguard) and 457 (soon to be @ Fidelity) are just gravy.

    While a Roth 401(k) would be nice, I expect our inflation-adjusted income in retirement to be substantially lower than what we’re making right now, so the deduction/deferral is still pretty nice.

    But yeah, that Roth conversion thing will be pretty sweet. I will definitely convert any non-deductible IRA contributions if/when the income limits go away (assuming we have any – thus far our IRAs savings are either in our Roths or in our (deductible) SEP-IRA. I’m still not sure I want to trigger the tax hit by converting deductible contributions.

    As far as the SEP opening process goes, yes, it was very easy. I did mine along with a rollover, so that extra complexity made it take six minutes instead of the five that you experienced. 😉

  14. Anonymous

    Does your work offer a Roth 401k? With the rate at which you’re saving, your retirement income will be formidable — it’d be a shame to pay taxes on it 😉

    While we’re not yet blessed enough to have the Roth phaseout at 150-160k AGI (MFJ), we’ve begun contributing to my employer’s Roth 401k, and will continue to max out mine and my wife’s personal Roths as well.

    I’ll also opened up a SEP-IRA at Vanguard last year. Talk about easy. Did it take you about 5 minutes? 🙂 I couldn’t believe how easy it was.

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