For many of us, saving for retirement is much like a Sudoku puzzle. Lots of numbers to digest and plenty of options. With 401(k), 457 and 403(b) plans out there, what’s a person to do?
While this numbers game can be intimidating, don’t let it overwhelm you. Just know that the potential benefits of contributing to these retirement plans could definitely outweigh the drawbacks.
Most of those who work for private employers have access to employer-sponsored 401(k) plans, while those who work in other industries are able to contribute to other accounts, including 457 and 403(b) plans. In this space, we’ll give you the 411 on all these different numbers and letters.
Generally, as a rule, if you work for a company that offers any kind of 401(k) match, contribute enough to take full advantage of it. If your company offers a dollar-for-dollar match on up to 3 percent of your income, you should contribute at least 3 percent. That will result in a total 6 percent contribution to your 401(k) plan after including the match. You should always deduct enough from each paycheck to get your employer's full match. If not, you're passing up free money.
And, a good way to begin preparing for retirement is to save at least 10 percent of your pre-tax income, whether it's in a 401(k) or somewhere else. Of course, the ideal number depends on your age, and those who start saving late will need to save a higher proportion of their salary. For example, if you're in your 20s or 30s, 10 percent might be enough for you to save and retire comfortably, since it has plenty of time to grow. It's best to save at a higher rate, such as 20 percent, if you're beginning to save in your 40s or older. The maximum you can contribute to a 401(k) in 2018 is $18,500, plus an additional $6,000 if you're age 50 or older.
A 457 plan has two types. A 457(b) is offered to state and local government employees, while a 457(f) is for highly-paid non-profit employees. For a 457(b) plan, you can contribute up to $18,500 in 2018 and an additional $6,000 if you’re older than 50. If you’re within three years of normal retirement age (according to your plan) then you may contribute up to $36,000. There’s also another catch-up option. According to the Internal Revenue Service (IRS), you may contribute, “the basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions).”
The 457(f) plan requires that the employee work until an agreed-upon time. If the employee leaves before that date, they forfeit their right to the 457(f) plan. This plan is usually only offered to select members of an organization. Because the employee has to fulfill certain requirements to receive their 457(f) at retirement, the plan remains in the hands of the company. If you have a 457(f) plan, you’re eligible to contribute up to 100% of your income. This is primarily used as a powerful benefit and recruiting tool to find talented executives. Unless you can realistically imagine being head of a non-profit, you’re unlikely to run into this plan in your career.
A 403(b) plan is typically offered to private-nonprofit employees and government workers, including public school employees. Like the 401(k), 403(b) plans are a type of defined contribution plan that allows participants to shelter money on a tax-deferred basis for retirement.
For many purposes, 403(b) plans are similar to 401(k) plans. Both allow you to save money on a pre-tax basis, effectively reducing your taxable income and earning a tax break in the year of your contribution. For 2018, the annual contribution limit (called the elective deferral) is the lesser of the employee's compensation or $18,500. An additional catch-up contribution of $6,000 is allowed for workers age 50 and above.
However, there are a few key differences. Although both 401(k)s and 403(b)s typically offer participants a menu of investment choices, 403(b) plans are limited to offering only annuities and mutual funds. In practice, that ends up being less of a difference, as most 401(k) plans also stick with fund options, but historically, many 403(b) providers have relied on annuity products that can be more expensive than similar mutual funds.
More broadly, you can expect your employer to have less involvement with a 403(b) plan than private employers take with 401(k)s. That might mean less of a chance at getting an employer match, but it can also mean that those employers who do match contributions might let them vest more quickly.
The numbers – as confusing as they might seem – don’t lie. Contributing to one of these retirement plans is a wise investment strategy. For more information, please email me at email@example.com or call my office at 985-605-7185.
About Jeremy Smith
With nearly two decades of experience in the financial services industry, Jeremy Smith serves as a dedicated and knowledgeable financial advisor and the founder of Harbor Wealth Management. He specializes in serving retirees, pre-retirees, small business owners, and widows, providing a comprehensive array of investment management and financial planning services. Jeremy aims to serve his clients as a financial guide who is here for their every need, helping families find lasting plans so they can focus on what matters most to them. To learn more about Jeremy, visit www.myharborwm.com or connect with him on LinkedIn. You can reach Jeremy directly at firstname.lastname@example.org or by calling his office at 985-605-7185.
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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. You should discuss your specific situation with the appropriate professional.