If you work for a state or local government or tax-exempt organization that meets Internal Revenue Code 501, you might have the option to fund your 457(b) retirement account with after-tax money. In this case, your contributions are taxable and would show on your annual W-2 in box 12, which is coded as “EE.” This code means you made after-tax contributions to a government section 457(b) retirement plan.
Employer-sponsored after-tax programs are established as Roth plans. For example, private sectors employers might offer Roth 401(k) programs, while government and tax-exempt organizations may provide Roth 403(b) and Roth 457(b) plans. Someone who does not have an employer to sponsor her plan can establish an after-tax Roth individual retirement account.
Pretax Versus After-Tax
A traditional 457(b) plan allows you to fund your account with pre-tax money. This means that no federal, and in most cases no state, income tax is withheld from your contributions at the time of payroll deduction. This process lowers your taxable wages and gives you more take-home pay than if you had paid with after-tax money. With a Roth 457(b) plan, your contributions are subject to taxation when they are made. This process does not lower your taxable wages. The downside to the pre-tax plan is that you must pay income taxes on your contributions when you withdraw your money. You will also be taxed according to the income tax rate for the withdrawal year, which could be higher than when you made your contributions. With a Roth account, you do not owe any income taxes on your contributions when you withdraw your money.
Pre-tax contributions are not included in your gross taxable wages in box 1 of your annual W-2 because the funds are not taxable at the time of payroll deduction. Your after-tax contributions, however, are included in your taxable wages on your W-2 because you paid taxes on those wages. If you work for an IRS-qualified tax-exempt organization that offers a Roth 457(b) plan, your employer must state your after-tax contributions in Box 12, under code EE.
If you would like to open an after-tax retirement account, consult your human resources department to know if that option is available. For your employer to offer a valid Roth plan, it must have a traditional retirement plan in existence. You may participate in a traditional and a Roth plan simultaneously; however, your contributions cannot exceed the total limit the Internal Revenue Service mandates for the year.
As of July 2013, you may stash up to $17,500 in your traditional and/or Roth account, and an extra $5,500 if you are 50 or older. Your employer may match your contributions. In this case, your total annual limit is $51,000 if you are under 50 and $56,500 if you are 50 or older. Depending on the plan, for three years before their normal retirement age, 457(b) participants might qualify to make special catch-up contributions of twice their annual limit.
- IRS.gov: Before-Tax or After-Tax Contributions
- IRS.gov: IRC 457(b) Deferred Compensation Plans
- IRS.gov: Roth Comparison Chart
- Minnesota Deferred Compensation Plan: Your Guide to Roth 457(b) Contributions
- IRS.gov: 2013 General Instructions for Forms W-2 and W-3
- IRS.gov: Index
- ICMA-RC: 457 Contributions
- Etrade Financial: Which IRA is Right for You?
- IRS.gov: Retirement Topics - 457(b) Contribution Limits
- Groom Law Group: Roth 401(k) Plans