Just as with a solo 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. Also, a 403b allows for designated Roth contributions. Salary contributed to a Roth account is taxed currently but is tax-free (including earnings) when distributed.
Jus like solo 401k plans, some 403b plans also allow for employee voluntary after-tax contributions. While Voluntary after-tax contributions are also made with post tax dollars just like designated Roth contributions, voluntary after-tax contributions are not designate Roth contributions. For instance, earnings on the Roth designated contribution grow tax free whereas earnings that accumulate in the voluntary after-tax account are taxable upon distribution.
Individuals who also participate in a solo 401k plan because they are self-employed on the side, for example, will often make solo 401k voluntary after-tax contributions. However, you must keep in mind the impact of 403b contributions on solo 401k contributions including voluntary after-tax contributions. Because of the quirky 403 contribution rules which also impact both the voluntary after-tax contributions and profit sharing contributions in addition to employee contributions, you will need to subtract the 403b contribution amount from your total solo 401k contribution calculation amount.
Example
For 2022, Tom contributes to his 403b employer plan and also contributes to his solo 401k since he is also self-employed on the side.
Tom contributes $15,000 to his 403b based on compensation from his school employer.
He now wishes to make employee voluntary after-tax contributions to his solo 401k based on $75,000 of W-2 wages generated from his self-employed business LLC which is taxed as an S-corp.
Even though the solo 401k maximum contribution limit for 2022 is $61,000, Tom won’t be able to make the full contribution amount to his solo 401k because the 403b contribution rules require the amount already contributed to the 403b–the $15,000 in Tom’s case–subtracted from the allowed solo 401k contribution amount. As a result, the maximum voluntary after-tax contribution that Tom may make to his solo 401k for 2022 is $46,000 ($61,000 minus $15,000).
