Posted by Income Taxes and Bookkeeping LLC

Everything You Need to Know About 403 (b), 401k, & 457 Plans

Everything You Need to Know About 403 (b), 401k, & 457 Plans

Retirement plans come in many types available for everyone to choose from. Self-employed people, however, are restricted only to 401(k) and 403(b) as their primary retirement account. 

This article sheds light on essential information people need to know about these plans:

Understanding 401(k)

This comes from profit companies to assist their workers to save for retirement. Years ago, companies offered pensions – a form of payment guaranteed to retired workers from the employer. 

Later, Congress passed an act that led to the birth of 401(k). After Uncle Sam issued regulation against employee reduced salary for workers as a retirement plan, many companies switched to 401(k). As of last year, over $6 billion was invested. 

A 401(k) is a plan in which your company enjoys tax benefits for sending money to an account designated for you. It is a qualified plan, and you can also contribute to the account before taxes.

In 2020 and 2021, a qualified plan allows users to have as much as $19,500. It is impossible to withdraw money from your 401(k) plan till age 59.5, except you meet some conditions set forth by Uncle Sam. 

There are several rules for Roth 401(k) plans.

Retirement plans from companies alongside 401(k) limit one's investment choices. While an IRA allows you to choose various types of investment products, 401(k) plans had only 27 options as of 2016. 

Understanding a 403(b)

Organizations that offer 403(b) retirement plans are schools, religious bodies, nonprofits, etc. profit organizations cannot provide a 403(b) plan. 

Similar to the 401(k) plan, a 403(b) plan allows one to make deposits with the tax-deferred. The same contribution exists for the 403(b) plan as the 401(k) plan, alongside the same withdrawal rule. However, some employees are bound by one difference: having 15 years in service with an organization considered a "qualified organization" qualifies you to contribute an extra $3000 to your 403(b) plan. The 401(k) plan does not have this advantage.

Another way where they differ is the choice of investment. While a lot of 401(k) plans give a series of mutual funds as investment choices available, you have other choices with it. You can only get mutual funds and annuities with 403(b). This makes the investment options available with 401(k) limited. 

The Different 457 Plans 

There are two plans with 457 plans: Workers of the state and local government have 457(b) while nonprofit executives in top-level positions use 457(f).

Understanding 457(b)

A 457(b) plan allows one to contribute as much as $19,500 in 2020 and 2021. For people 50 years above, they can contribute an extra $6500 in 2020 and 2021.

For people within three years of their retirement, they can contribute more. There is an option to donate more, although the previous contribution limit binds the maximum contribution within three years of retirement age.

Understanding 457(f) plan

There are significant differences between the two 457 plans. Many people refer to them as “golden handcuffs” because the benefit you get is a factor of your years of service alongside other performance factors. 

With the 457(f) plans, compensation is tax-deferred. However, this compensation has a considerable forfeiture risk, meaning that they can lose the benefit if they do not meet the service period or performance request since 457(f) plans majorly apply when recruiting executives from the private sector. The compensation can only be taxed when it is guaranteed and not subjected to loss by forfeiture.

Chances of giving a 457(f) are low, except you lead an organization that is nonprofit. Since the compensation is deferred and not yet paid, it cannot be taxed, which means the employer still holds the benefit. For executives to benefit from 457(f) plans, they need to perform the service for two years at least. 

People with 457(f) plans have no limit on the amount of income they can defer from taxation. Although, whatever you defer comes with a high forfeiture risk. 



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