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414(h) Pick-Up Plans: A Guide for Government Employees

If you’re a public government employee, you may have heard about the 414(h) pick-up plan, which is basically a pension plan. “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 things 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. 

1 https://www.irs.gov/government-entities/federal-state-local-governments/employer-pick-up-contributions-to-benefit-plans

2 https://www.irs.gov/government-entities/federal-state-local-governments/government-retirement-plans-toolkit