401(k), 403(b) and 457(b)

What does it mean when we state that employer contributions may have to "vest" for a period of time?

"Vesting" means that you wouldn't be able to take your employer's contributions with you if you leave the company before the vesting period has elapsed.

How much can you contribute to a 457(b) plan?

$19,000 annually. There is a $6000 "catch-up" contribution in a government-sponsored 457 (b) plan for an individual who is age 50 or older.

What are the six most common IRA accounts?

401(k) Plan Individual Retirement Accounts (IRAs) Simple IRA Roth IRAs Roth 401(k) SEP IRA

How is a 457(b) plan is a lot like a 401(k) or a 403(b)?

A 457(b) plan is offered through your employer. Contributions are taken from your paycheck on a pre-tax basis, which lowers your taxable income. You can invest the contributions in mutual funds that you choose from an array of options. Interest and earnings on that money are not taxed until you withdraw the funds at retirement.

Are contributions to a 401(k) plan offered on a pre-tax or post-tax basis?

A pre-tax basis.

At what age can you safely start making deductions from a 401(k)?

Age 59 1/2

What is a 403(b) plan?

It's basically a 401(k) plan for employees of nonprofits, hospital organizations, and public education institutions.

Why is it important to always take full advantage of your employer match with a 403(b)?

It's basically free money, earmarked for your retirement.

What is a 457(b) plan?

It's essentially a 401(k) for government-workers. They also contain a few unique benefits that make them even more attractive.

Is a 401K very different from a 403(b)?

No. Aside from the occupational requirements, the plans are basically the same.

Can you make unlimited contributions to a 401k account?

No. The IRS imposes annual contribution limits of $19,000. This increases to $25,000 if you're age 50 or older.

Can I choose between a 403(b) or a 401(k)?

No. Your employer will determine the type of plan that it offers you.

Are the gains in a 401(k) tax-free?

No. They are tax-deferred.

What happens if I change jobs?

Once you are vested, you can take the money with you when you change jobs. You will likely need to roll it over in an IRA account.

Is there anyway to avoid a penalty for removing 401(k) funds prior to age 59 1/2?

Possibly. Some 401(k) plans offer loan provisions for emergencies.

How is a 457(b) plan different in terns of contribution limits?

Some employers may double catch-up contributions three years before retirement age to twice the annual limit or $38,000 as of 2019.

How much should I contribute to a 403(b)?

The recommended goal is 15% of their annual income for retirement each year.

How much is the penalty (for early withdrawal) on a 457(b) plan?

There are no penalties {unlike a 401(k) or 403(b)}, if you withdraw funds prior to age 59 1/2.

How would one secure a 401(k) plan?

Through their employer.

Can a 457(b) plan be used in conjunction with a 403(b) a 401(k)?

Yes and it's a big advantage. If you combine a 401(k) or a 403(b) with a 457(b), you can contribute the maximum amount to both plans. That brings your annual elective deferral limit up to $36,000, even if you are younger than age 50. This does not include catch-up contributions or an employer match.

Do contributions to a 401(k) reduce the amount of income you must pay taxes on in that particular year?

Yes. For example, you'd be taxed on $70,000 if you earned $75,000 and contributed $5,000 to your 401(k).

Can employers make contributions to a 401(k)?

Yes. Typically up to 6%.

Do you have any investment options with a 401K plan?

Yes. You can choose conservative, middle or high-risk investments.

Would there be a penalty for removing 401(k) funds prior to age 59 1/2?

Yes. You could pay a 10% penalty and the withdrawal would be subject to federal and state income taxes.