414(h) Pick-Up Plans: A Guide for Government Employees
If you’re a public government employee, you've probably heard about a 414(h) pick-up plan, which is a pension plan that your employer can add contributions to.
“Pick-up” is in reference to the fact that your employer is able to put employee contributions into their accounts on a pre-tax basis as you might see with a 401(k). Both employer and employee contributions are made, which then grow on a tax-deferred basis until you retire.2 Fortunately, if you leave your government job for another government entity, this plan may roll over depending on what the institution allows.
Like a traditional IRA or 401(k), a 414(h) plan lets you save money for your retirement while also providing you with some tax benefits. However, one key thing to note with 414(h) plans is that they do not qualify for the Retirement Savings Credit, where the maximum credit amount is up to $2,000 ($4,000 if you’re married and filing jointly).
How Your 414(k) Contributions are Deducted
Like a 401(k), you won’t deposit money into your 414(h) plan like you would with your checking or savings account. Instead, this money will be automatically taken out of your paycheck each pay period. Technically, you won’t see any of these funds until you retire.
414(h) Plans and Federal Income Tax
Because your employer will not be removing federal income tax from your contributions, you will experience a reduction in your taxable wages, as well as your federal income tax withholding. When your employer completes your yearly W-2, they will not fill in anything for Box,1 which is your federal taxable gross wages. Once it’s filing season, these wages will be listed as wages, salaries and tips on your Form 1040. Because your pre-tax 414(h) contributions reduce this amount, you will not have the option to claim it as a deduction.
What About Society Security and Medicare?
Unfortunately, you will not get a tax break when it comes to Social Security and Medicare.1 These two taxes will be withheld when your employer adds your contributions to your wages for that payroll period. These deductions are listed on your Social Security and Medicare wage boxes.
Rules Regarding Withdrawing Your Contributions
If you leave your current employer or retire, you can withdraw money from your 414(h) account. However, you will need to pay federal income tax on it. If the state you live in determines that these funds are taxable at the time of your payroll deduction, it is possible that you may not incur any state income tax.
Where You Live Matters
Each state has different rules when it comes to 414(h) plans. In some states, you may not be able to claim a deduction on your state tax return because your employer will not take state income tax out of your contributions. Additionally, in certain states, your contributions may be taxable. Therefore, your employer will need to deduct taxes from your overall contributions.
For more information on different retirement plans, feel free to contact our team, California Retirement Advisors, at cradvisors.com or call at 888-643-7472 to request a meeting with one of our licensed advisors.
By Christian Cordoba
CERTIFIED FINANCIAL PLANNER™
Founder, California Retirement Advisors
Investment advisory services offered through Mutual Advisors, LLC DBA California Retirement Advisors, a SEC registered investment adviser. Securities offered through Mutual Securities, Inc., member FINRA/SIPC. Mutual Securities, Inc. and Mutual Advisors, LLC are affiliated companies. CA Insurance license #0B09076. This content is developed from sources believed to be providing accurate information and provided by California Retirement Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. California Retirement Advisors, nor any of its members, are tax accountants or legal attorneys and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional.