401K
Retirement Plans

Information obtained from MyBankTracker Article:
"401(k) vs 403(b) vs 457 Plans: Compare Employer-Sponsored Retirement Plans"
Written by Kevin Mercadante - Former Mortgage Loan Officer (Updated: June 27, 2022)

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401(k)s are the most popular of the all retirement plans. They’re offered by many for-profit employers, including the vast majority of large employers.

The main feature that distinguishes them from the other two plans is that they are offered by for-profit employers, like major corporations.

One of the factors that most distinguishes the 401(k) plan – as well as the 403(b) 457 plans, since they all have the same limits – is the very generous contribution amounts.

You can contribute up to $19,500 per year, or $26,000 if you are 50 or over (this includes a $6,500 “catch up” provision for older workers).

What’s more:

You can contribute the full amount up to 100% of your earned income up to the maximum contribution limits.

That means you can contribute $19,500 if you make $100,000 per year, $50,000 per year, or even $25,000.

Since the plans are employer-sponsored, you’ll typically fund them through regular payroll contributions.

Once again, not only are those contributions tax-deductible, but any investment earnings in your account are also tax-deferred.

Early Withdrawals

If you withdraw funds from the plan prior to reaching age 59 ½, you’ll pay ordinary income tax on the amount withdrawn, plus a 10% early withdrawal penalty tax.

 

However, you can begin taking withdrawals after age 59 ½, subject only to ordinary income tax.

Required Minimum Distributions (RMDs)

You can allow the funds in your 401(k) plan to continue growing even after you retire. But you will be required to begin taking RMDs beginning in the year when you turn 72.

RMDs will begin at approximately 4% of your plan balance, with the percentage increasing slightly each year throughout the remainder of your life.

 

The basic idea of the RMD is to force funds out of the plan so that they will become taxable. That’s unfortunate, but that’s the way the plan is set up.

Investment Options

 

You’ll generally be limited to investment options contained in your employer plan.

 

That may restrict you to a single mutual fund family, or a large, diversified brokerage firm allowing you to invest in anything you want.

 

However, you won’t be able to select the broker that will hold your account – that decision is made entirely by your employer.

Additional Information: Pertains to 401K's, 403B's and 457B's

 

In most cases, you won’t have a choice as to which plan you’ll participate in.

 

That's to say:

 

Your choice is determined by the type of employer you work for.

 

If it’s a private, for-profit corporation or business, you’ll most likely be offered the 401(k) plan. But if it’s a non-profit or government agency, you may be offered either the 403(b) or 457 plan.

However, a very limited number of government agencies offer a 401(k) in addition to either a 403(b) or 457 plan.

And in some cases you may have different plans with different employers.

 

For example, you may begin the year with a government agency that offers a 457 plan and end the year with a private corporation offering a 401(k) plan.

 

If you have an opportunity to participate in both plans, the maximum annual combination of contributions will be $57,000, or $63,500 if you are 50 or older. That includes your own regular contributions, catch-up contributions, and any employer matching contributions.

How to Best Manage Your 401(k), 403(b) or 457 Plan

Contribute Regularly

If your employer offers any of the above three plans, you should participate.

 

Even if you’re covered by a defined benefit pension plan – which few workers are these days – a tax-deferred retirement savings plan can be an excellent supplement to a regular pension and monthly Social Security check.

 

By contributing as much as you can, you’ll not only get the benefit of a lower annual tax bill, but you’ll build a large retirement nest egg more quickly.

 

If that’s done early in your life and consistently thereafter, it may eventually open the opportunity to early retirement.

Employer Matching Contributions

 

This applies primarily to 401(k) plan participants. But even then, employers are not required to offer a matching contribution, though many do.

 

So:

 

At a minimum, you should make the smallest contribution you can to get the largest employer match.

 

For example, if your employer will match 50% of your contribution, up to 3% of your salary, you should contribute at least 6% of your pay to the plan. That will not only maximize the employer matching contribution, but also get you an effective 9% annual contribution rate.

Explore Roth Options

 

Many employers offering any of the three plans also provide a Roth option.

 

If offered, your contributions to the Roth portion will not be tax-deductible.

 

However, investment income will accumulate in the plan on the tax-deferred basis.

 

Upon reaching age 59 ½ – and if you’ve participated in the plan for a minimum of five years – you’ll be able to begin taking distributions from the Roth portion of your plan on a tax-free basis.

 

It’s an excellent strategy to create tax diversified retirement income.

 

If an employer does offer a Roth option, you’ll generally be given the ability to determine how much of your plan contribution will go to the regular plan and how much to the Roth portion.

 

But if you choose, you’ll be able to direct up to 100% of your total contributions into the Roth portion.

 

One factor to be aware of however is the employer match.

 

If the employer does match your contribution to the Roth portion, it will not go into your Roth account. Instead, it will be placed into a regular plan, even if you don’t have one in place. That’s because while your own contributions to a Roth account can potentially be withdrawn tax-free, employer matching contributions cannot.

Be Careful of Loan Provisions

 

An employer can offer a loan provision on any of the three plans, but it’s not required to do so by the IRS.

 

If a loan provision is offered, it’s limited to not more than 50% of your vested plan balance, up to a maximum of $50,000. It must generally be repaid in not more than five years.

But as convenient as retirement plan loans are, use them sparingly. Even if they are technically “paying interest to yourself”, that “return” is generally lower than what you’ll earn on other investments.

 

Furthermore:

 

Since part of your retirement contributions will be going toward loan repayment, this will reduce the future value of your plan.

 

Also be aware that if you terminate your employment before the loan is repaid, you’ll be required to repay the loan proceeds within 60 days of departure.

If not, the employer is required to consider the unpaid portion of the loan to be a distribution.

Not only will it be subject to ordinary income tax, but also the 10% early withdrawal penalty tax if you are under age 59 ½.

What Happens to Your Plan When You Terminate Your Employment?

 

Whether you have a 401(k), 403(b) or 457 plan, you’ll be given one of four options when you terminate your employment:

  • Keep the plan where it is.

  • Roll the plan over to a comparable plan with a new employer.

  • Roll the plan over to a traditional IRA account.

  • Take distribution of the plan funds personally.

 

If you choose one of the first three options, there’ll be no tax consequences.

 

But if you choose the fourth option, the total amount of the distributed funds will be subject to ordinary income tax, as well as the 10% early withdrawal penalty if you’re under age 59 ½.

Final Thoughts

 

401(k), 403(b) and 457 plans are among the most generous defined contribution plans available.

 

If offered by your employer, you should take full advantage.

 

Invest as much as you can, as early as you can, since that will create the greatest growth in your plan.

 

If you heavily fund your plan early in life, you may have sufficient funds that you can either reduce future contributions or eliminate them entirely.

-End of Article by Kevin Mercadante

NOTE: WE PROVIDE GUARANTEED PROTECTION FROM ANY FURTHER LOSES

FOR YOUR HARDEARNED MONEY.

WE GUARANTEE NO FURTHER LOSES

NO MATTER WHEN THE MARKET SINKS!

MOST PEOPLE DON'T REALIZE THAT THEIR RETIREMENT PLANS PERFORMANCE IS DIRECTLY CONNECTED TO MARKET GAINS AND LOSSES.

SCHEDULE A NO OBLIGATION CONSULTATION

WITH US AND WE'LL SHOW YOU HOW!