401(k), 403(b) & TSP Basics

Employer-sponsored retirement plans—401(k), 403(b), and TSP—are the primary retirement savings vehicles for most American workers. Understanding their contribution limits, employer matching rules, and distribution requirements is essential for the EA exam.

2024 Contribution Limits Overview

For the 2024 tax year (tested on EA exams May 2025 - February 2026):

Important: The $23,000 elective deferral limit applies per person, not per plan. If you participate in multiple plans (e.g., 401(k) and 403(b)), combined deferrals cannot exceed $23,000.

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401(k) Plans

Who Offers 401(k) Plans

• Private sector employers (for-profit companies)
• Some non-profit organizations that don't use 403(b)

Traditional vs. Roth 401(k)

Most 401(k) plans offer both Traditional and Roth contribution options:

Employer Matching Contributions

Key Point: Employer matching contributions do NOT count toward the $23,000 elective deferral limit.

Example: Sarah, age 45, earns $100,000 and her employer matches 50% of contributions up to 6% of salary.

• Sarah defers: $23,000 (maximum elective deferral)
• Employer match: $3,000 (50% × 6% × $100,000)
• Total annual addition: $26,000 (well under $69,000 limit)

Important: Employer matching contributions are always pre-tax, even if the employee makes Roth contributions. Matches go into a separate Traditional 401(k) sub-account.

Vesting Schedules

Employer contributions may be subject to a vesting schedule:

Employee contributions (elective deferrals) are always 100% immediately vested.

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403(b) Plans

Who Offers 403(b) Plans

• Public schools (K-12 and colleges)
• 501(c)(3) tax-exempt organizations (hospitals, charities, churches)
• Cooperative hospital service organizations
• Public school systems

Same Contribution Limits as 401(k)

Special 15-Year Catch-Up Rule

403(b) plans may offer an additional catch-up for long-service employees:

Eligibility Requirements:

1. At least 15 years of service with the same eligible employer
2. Employer is a public school, hospital, home health agency, health/welfare agency, church, or convention of churches

15-Year Catch-Up Amounts:

• Annual limit: $3,000 additional per year
• Lifetime limit: $15,000 total
• Must use the formula: The lesser of:
  • $3,000, OR
  • ($5,000 × years of service) minus prior 403(b) elective deferrals

Maximum Contribution for Eligible 50+ Employee with 15+ Years:

• $23,000 (regular deferral)
• $3,000 (15-year catch-up)
• $7,500 (age 50+ catch-up)
• Total: $33,500 maximum elective deferral

Important: The 15-year catch-up is used BEFORE the age 50+ catch-up.

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Thrift Savings Plan (TSP)

Who Participates in TSP

• Federal government employees (civilian)
• Members of the uniformed services (military)

Same Contribution Limits as 401(k)

Agency/Government Contributions

For FERS (Federal Employees Retirement System) participants:

• Automatic 1%: Agency contributes 1% of basic pay regardless of employee contribution
• Matching contributions: Agency matches up to 4% of basic pay
  • First 3%: Dollar-for-dollar match
  • Next 2%: 50 cents per dollar

Maximum Agency Contribution: 5% of basic pay (1% automatic + 4% matching)

TSP Investment Options

Key Points:

• G Fund is unique—guaranteed by U.S. government with no risk of loss
• L Funds automatically become more conservative as target date approaches
• Lowest expense ratios in the industry

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Comparison Table: 401(k) vs. 403(b) vs. TSP

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Hardship Distributions

Requirements for Hardship Distribution

A hardship distribution from a 401(k), 403(b), or TSP requires:

1. Immediate and heavy financial need (safe harbor reasons):

   • Medical expenses for employee, spouse, dependents, or beneficiary
   • Purchase of principal residence
   • Tuition and education expenses for next 12 months
   • Payments to prevent eviction or foreclosure
   • Funeral expenses for family members
   • Certain expenses to repair damage to principal residence
   • FEMA-declared disaster expenses

2. Limited to amount necessary to satisfy the need (may include taxes and penalties)

Tax Treatment of Hardship Distributions

• Taxable as ordinary income (unless Roth basis)
• Subject to 10% early withdrawal penalty if under age 59½
• Cannot be rolled over—permanently reduces account balance
• No repayment option (unlike loans)

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401(k)/403(b) Loans

Loan Rules

Loan Default Consequences

If loan is not repaid (e.g., upon termination):

• Outstanding balance treated as distribution
• Taxable as ordinary income
• 10% penalty if under age 59½

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Rollover Rules

Direct vs. Indirect Rollovers

Rollover Considerations

• Direct rollover preferred: Avoids withholding and 60-day deadline
• Indirect rollover trap: 20% withheld means employee must deposit 100% of original amount (including the withheld portion from other sources) to avoid tax on the withheld amount
• One-per-12-month rule: IRA-to-IRA indirect rollovers limited to once per 12 months; does NOT apply to 401(k)/403(b)/TSP rollovers

Eligible Rollover Destinations

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Required Beginning Date (RBD) & RMDs

Required Minimum Distributions

As of SECURE 2.0:

• RBD: April 1 of the year following the year you turn 73
• Still-working exception: If still employed and NOT a 5% owner, can delay RMDs from current employer's plan until retirement
• Roth 401(k)/403(b)/TSP: No RMDs during owner's lifetime (as of 2024)

RMD Calculation

RMD = Account Balance (12/31 prior year) ÷ Life Expectancy Factor (from IRS Uniform Lifetime Table)

Penalty for Missing RMD

• 25% excise tax on amount not distributed (reduced to 10% if corrected within 2 years)

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EA Exam Tips

Memorize the 2024 limits: $23,000 deferral, $7,500 catch-up (age 50+), $69,000 annual addition

15-year catch-up is 403(b) only: $3,000/year, $15,000 lifetime, requires 15 years with same employer

Employer match does NOT count toward $23,000: Only employee elective deferrals count toward the deferral limit

Direct rollover avoids 20% withholding: Indirect rollovers have mandatory 20% federal withholding from 401(k)/403(b)/TSP distributions

TSP funds: G (Government bonds), F (Fixed income), C (S&P 500), S (Small cap), I (International)

Hardship distributions cannot be repaid: Unlike loans, hardship distributions permanently reduce the account balance