Over the next few weeks, we’ll revisit our series on retirement planning! This week, we’ll return and discuss the difference between 401(k)s, 403(b)s, 457(b)s and IRA plans.
Your eligibility for any of the three employer-sponsored defined-contribution plans will depend on your employer. 401(k)s are generally for for-profit businesses, while 403(b)s and 457(b)s are generally for non-profits, hospitals, ministries, and government entities. 403(b)s are often used to supplement existing defined benefit or pension plans with your employer.
As mentioned in the previous segment, one of the big benefits for 457(b)s is that they do not have penalties for early withdrawals. Additionally, 457(b)s have separate contribution limits than 401(k)s and 403(b)s. This means if you’re able to contribute to both a 457(b) and 403(b) plan, for instance, you can max out both at the $19,500 or $26,000 contribution limit *($20,500/$27,000 for 2022, and expected to be $22,500/$30,000 for 2023)*. This is not the case if you contribute to a 401(k) and a 403(b), as they share the combined $19,500/$26,000 contribution limit. *($20,500/$27,000 for 2022, and expected to be $22,500/$30,000 for 2023)*
IRAs are a bit different than the three aforementioned plans since they are not employer-sponsored plans, instead being individual retirement accounts with just your own contributions. The ability to make tax-advantaged contributions or to be eligible to participate at all depends on your income and whether or not you have access to an employer-sponsored plan at your work. For 2021 for traditional IRAs, if a single taxpayer, with access to a workplace retirement plan, makes more than $66,000 in a year *($68,000 in 2022)*, their tax deduction on contributions begins to phase out and they are ineligible for tax-free contributions altogether at $76,000 *($78,000 in 2022)*. For married couples filing jointly, phase out starts at $105,000 until $125,000 *($109,000/$129,000 in 2022)*, and for those without access to a workplace retirement plan, but their spouse does, their phase out is from $198,000 to $208,000 *($204,000/$214,000 in 2022)*. With that said, if you do not have access to a workplace retirement plan, and you are either unmarried or your spouse also does not have access to a workplace retirement plan, no income phase out applies to you. For Roth IRAs for 2021, you are ineligible to contribute at all if you are single and make more than $140,000 *($144,000 in 2022)*, with a phase out on how much you can contribute starting at $125,000 *($129,000 in 2022)*, and for those married but filing jointly, the income limit is $208,000 with the phase out beginning at $198,000 *($204,000/$214,000 in 2022)*.
We’ll return next week to discuss estimating how much you need to save for retirement.