|Feature||401(k) Plan||403(b) Plan|
|Eligible Employers||All non-governmental employers||501(c)(3) tax-exempt and publiceducational organizations|
|Requirement for perticipation||Restricted to profit organizations||Restricted to non-profit organizations|
|Eligiblity of participants||Employers may require one-year full service||Employees can defer planning once hired|
|Compliance||Necessary to perform non-discrimination test||Not necessary to perform a non-discrimination test.|
401(k) Retirement Plan
One of the most common ways people save for retirement is by contributing to a 401(k), a retirement savings account offered by many employers. So what is a 401(k) and how does it work? We’ll look at three main concepts: contributions, investments, and account management.
401k rollover is a transfer of money from an old 401(k) to an individual retirement account (IRA) or another 401(k). Typically the money must go into the new account within 60 days of coming out of the old individual retirement account (IRA) or another 401(k).
It’s called a 401(k) because of the section of the IRS code that sets out the rules for this type of account, section 401 subsection K. Basically, the government allows companies to offer retirement savings accounts with certain tax advantages in an effort to encourage people to save for retirement. Tax advantages are one of the main benefits of contributing to a 401(k).
When you sign up for a 401(k), you’ll set an amount or percentage to be automatically taken out of each paycheck to fund the account. With a traditional 401(k), the amount you contribute is deducted from your taxable income. Let’s say you earn $100,000 per year and contribute $10,000 to your 401(k). That means your total taxable income for the year would be $90,000, reducing the amount you have to pay taxes on that year.
In addition, the money you contribute to a 401(k) can grow tax-deferred, meaning you don’t pay taxes on it until you withdraw it in retirement. In the meantime, the money in the account can compound without being taxed. Some employers also offer a Roth 401(k), which allows you to contribute after-tax dollars.
Instead of decreasing your tax burden now, this allows you to take the money out tax free during retirement. Only you can determine which 401(k) is right for you. It depends on several factors, like how much you expect to earn later in life and whether you want tax benefits now or later. Some people choose to contribute to both. Talk to a tax professional for more information. 401(k) tax benefits have some limits. The money you put in a 401(k) is basically untouchable until you turn 59 and a half.
If you withdraw money before then, you’ll face an early withdrawal penalty and income tax unless you qualify for one of the few exceptions, like paying for substantial medical expenses or disability. Overall, it’s best to avoid jeopardizing your retirement savings with early withdrawals. The IRS limits how much you can contribute to a 401(k) each year.
These limits have changed over the years and can depend on your age, so it’s best to check with the IRS or a tax professional. Another major benefit of participating in a 401(k) is that some companies offer a match. That’s extra money the company contributes to your account just for participating, and it doesn’t count toward your individual limit. So, say your employer matches 50% of all your contributions up to 6% of your annual salary. This means if you make $50,000 and you contribute that’s $3,000 your employer would contribute $1,500 on top of that. If your employer offers a match, be sure to contribute enough to get the maximum amount. Don’t leave free money on the table. Keep in mind, some companies have what’s called a vesting period.
That’s the period of time you have to work there before the money the company contributes becomes fully yours. Check with your employer to learn more about your company’s policy. Now that you understand contributions, let’s talk about choosing investments. 401(k)s typically offer a limited number of investments, like mutual funds or exchange-traded funds. If you find the number of investment choices too limited, see if your employer offers a self-directed 401(k).
These plans may provide additional investment choices. Either way, you’ll have to weigh the risks and fees associated with each investment. It’s generally best to not take the money out until you reach retirement age, so focusing on long-term investing rather than quick profits might be a prudent choice. When managing your account, be on the lookout for the drawback of 401(k)s: fees. Some 401(k) providers charge additional administrative fees on top of the cost of individual investments. These fees are not always obvious, so check with your plan administrator or use an online 401(k) fee analyzer.
If you’re unhappy with the fees you’re paying, you can consider other retirement accounts like Individual Retirement Accounts, or IRAs. Even if your 401(k) offers limited investment choices or charges high fees, it may still be worth contributing enough to get the maximum match from your employer. The match may outweigh these drawbacks. Over time, you’ll likely work for several companies, which could mean you have many 401(k)s. So what do you do with those old accounts? You can always combine them into your current 401(k) or an IRA through a process called a rollover.
This allows you to move funds directly from one retirement account to another without incurring tax penalties. Keeping your retirement savings in fewer accounts may make them simpler to manage. The 401(k) is just one kind of retirement account, but the tax benefits and potential employer match make it a powerful way to invest for the future. Contributing to a 401(k) is one of the simplest ways to pay yourself first.
403b Retirement Plan
- KEY FACTS
- 403(b) plans are similar to 401(k) plans, except participation is limited to employees of certain tax-exempt organizations.
- There are tax benefits to making contributions to a 403(b), usually in the form of tax-free contributions.
- Contribution limits apply a. certain criteria must be met in order to withdraw from a 4o3(b).
So you have this 4O3(b), or TSA available, should you use it, what is it? A 4O3(b), or otherwise known as a TSA, or tax-sheltered annuity, is what I like to refer to as a teacher’s 401(k). Now it’s not necessarily for teachers, but the two types of organizations that can have a 403(b) are non-profits and school boards.
That’s why usually if you’re a teacher, by far the most amount of people who have 403(b)s are teachers, but principals can have them, secretaries, administrators, superintendents, cafeteria workers, they can all have 403(b)s. Or if you work for a non-profit, like a hospital will usually see people with it, or other non-profits, you can have a 403(b) as well. Now, if you’re wondering how a 403(b) works, you can go ahead and click here to the link to How a 401(k) Works.
Most of it is exactly the same, the one big difference with the 403(b) is you’ll usually see multiple providers. Meaning that you might have three, four, five, 10, I have seen upwards of 25 different providers with an employer. So let’s say it’s a really big school board, they can give you options by having multiple 403(b) providers. Usually a 401(k) you only have one provider, meaning you have to use whatever the company sets up for you and you have to hope that it’s a good plan.
With the 403(b), you can actually shop different companies inside of your plan, which is really nice. The other thing with the 403(b) is if you wanna take money out, because there’s different plans you need a TPA, or a third party administrator to get access to your money. Now you might say, “Well that sounds really complicated.” And that’s because it is, (laughter) but you can call your employer and find out exactly who that TPA is to get access, or even better, if you have a 403(b) agent or representative, just ask them to do it, that’s what they get paid to do.
Now, if you have a 403(b) and you work for a school board or a hospital, you might also have a pension. So it’s pretty easy to say, “Okay, well I don’t need to contribute to my 403(b) ’cause I’m already covered for retirement.” Not necessarily, we like to call it the Four Buckets for people with pensions. You have your pension, you have your Social Security, you have some retirement savings, and then you usually have some un-used sick leave, that’s your kind of four buckets, and usually you need all four of those to equal your retirement benefit. Now, for some of you, you’re right, you are good, you don’t need to contribute any more if you don’t want to, but for other people you might not be able to retire just on Social Security and your pension.
Which of the following is generally true about 401(k) and 403(b) retirement plans?
A. They’re offered by the employers to the employees
B. They bring various tax benefit to you
C. They restrict you about when you can withdraw your money
D. All of the above (Answer)
401(k) and 403(b) retirement plans
Under a 401(k) plan, the _ is responsible for choosing specific investments.
A 401(k) plan is a tax-advantaged retirement account offered by many employers. 401(k)s and pensions are both employer-sponsored retirement plans, but … With a pension plan, employers fund and guarantee a specific retirement. Under a 401k plan, the is responsible for choosing specific investments.
Employees are also responsible for choosing the specific investments within their 401(k) accounts, from the selection their employer offers.