When you’re young and hard at work, it can feel extremely irritating to have to go through the rigmarole of setting up a retirement savings plan. Paul Haarman says Retirement plans are particularly confusing because of how less awareness there is about them. There is much more to it than just having the popular 401(k) set up. And there are just as many alternative options, like the 403(b), traditional and Roth IRAs, and so on. That said it is extremely important to understand the nitty-gritty of retirement plans early in your career. So that you don’t find yourself in trouble when the clock is winding down and you’re expected to have a solid plan in place for your retirement years. This article by Paul Haarman covers the major aspects of the 401(k) and 403(b) plans.
The Absolute Fundamentals of the 401(k)
The 401(k), named after a federal tax code that defines it, is a tax-advantaged, employer-sponsored retirement plan. The primary way this account is funded it through deductions from your payroll, which are then, at least in part, matched by the employer. Employees are typically given control over the amount that they want to contribute every cycle, and experts suggest you contribute the full amount that is the maximum your employer is willing to match because any less would be refusing free money. A major thing to remember when dealing with the 401(k) is that the account holder (you) is expected to control the investment vehicle that the money put into the account goes towards. You can pick from a list of options mentioned by the service provider or your company, but traditional options include ETFs, cash alternatives, and company stock. You must remember to set up the investment option to see real benefits over time.
The 403(b) and its Principles
The 403(b) has several fundamentals that are similar to the 401(k), but it differs majorly in that it is offered to government employees and employees of other tax-exempt or not-for-profit organizations like schools and hospitals. 403(b) takes the form of a mutual fund custodial account or an annuity contract, thus earning the name “Tax-Sheltered Annuity” (TSA) from some. 403(b) plans are tax-deductible as well; they also receive matching contributions from employers. 403(b) plans vest over a much shorter period than 401(k)s, with several options even allowing for immediate vesting of funds. There are other benefits like additional “catch-up” contributions to the 403(b) fund that employees with a service record longer than 15 years are allowed to make.
The Comparison between 401(k) and 403(b)
The two major types of retirement plans are actually surprisingly similar in structure. They both offer robust tax-deferred and tax-deductible tracks for an employee to invest in their future. They have the same contribution caps, which amounts to $19500 in 2020 for someone under 50 years of age. Those over 50 are eligible for paying catch-ups of $6000 annually as well. You must be at least 59.5 years old to withdraw from either an account. Or both offers robust Roth IRA options if your employer approves. The obvious differences arise in the fact that they are offered by different companies (for-profit and non-profit). And that 401(k) funds typically have more diverse investment options, since you are not allowed to invest in real estate trusts and stocks using your 403(b) and typically limited to mutual funds or fixed and variable contracts.
Paul Haarman says Both 401(k) and 403(b) plans are very good options for anyone looking to secure a post-retirement fund. The 403(b) is especially good since it levels the playing field in terms of benefits for non-profit employees. Who were previously not offered the attractive option of a matching contribution from the employer that 401(k)s from private corporations would provide their employees. Further, both these options also come in Roth variants. Which are even more versatile and give you more choice as a beneficiary. Both plans also come with the option to borrow as much as 50% of the plan value (up to a predefined limit, and with strict rules for repayment). Which opens up an extra line of credit if you need to fund an important purchase like a home or an education later in your life.