Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and discuss 401(k)s, 403(b)s, 457(b)s and IRA plans.
First, let’s start with the similarities.
All four plans are based on tax-advantaged money you invested. This is different from defined benefit or pension plans, which pay out a guaranteed amount based on a formula that often includes factors like years of service and highest earning salaries.
All four plans generally have traditional and Roth options – traditional allowing for tax-free contributions and Roth allowing for tax-exempt withdrawals. All four plans have contribution limits. For 2021, the three employer-sponsored defined-contribution plans – 401(k)s, 403(b)s, and 457(b)s – have maximum contribution limits of $19,500 for those under 50 and $26,000 for those 50 and older *($20,500/$27,000 for 2022, and expected to be $22,500/$30,000 for 2023)*. For IRAs, the 2021 contribution limit is $6,000 for those under 50, and $7,000 for those 50 and older *($6,000/$7,000 for 2022, and expected to be $6,500/$7,500 for 2023)*.
All four plans generally have required minimum withdrawals starting at age 72, with the exception of Roth IRAs, and all except 457(b)s have a 10% penalty plus taxes for withdrawing before 59.5, with a handful of exceptions, such as having high unreimbursed medical expenses, being a qualified first-time homebuyer for IRA owners, or the disability or death of the plan owner. More exception can be found at the IRS website.
All three employer-sponsored defined contribution plans have the possibility of an employer match, however, for 457(b)s, that match goes towards your personal maximum contribution limit, which is not the case for 401(k)s and 403(b)s. Instead, for 2021, there is a combined maximum contribution for both employees and employers of 401(k)s and 403(b)s of $58,000 for those under 50 and $64,500 for those 50 and older *($61,000/$67,500 for 2022, and expected to be $66,000/$73,500 for 2023)*; however, your personal contribution limit of $19,500/$26,000 still applies! Those matches are typically vested in one of three ways, either they are immediately vested, with the employee having immediate ownership to the match, graded vested, where you gradually get ownership of matching funds, or cliff vested, which gives you 100% ownership after a certain number of years, often three.
All three defined contribution plans may also have options to borrow money from the plan.
Lastly, all three defined contribution plans are typically portable, allowing them to be rolled into a new employer’s plan or into an IRA.
Next week, we’ll return and discuss the difference between these four plans.