401k and 403b Retirement Plans
- January 12, 2017
- By: Greenpath Financial Wellness
401k and 403b retirement plans are employer-sponsored and allow employees to deduct money from their paychecks, deposit it in a retirement account and earn interest tax-deferred. Tax-deferred means this saved income is not taxable until you withdraw it at the age of 65 or later.
How 401k and 403b Retirement Plans Work
You decide how much money you want deducted from your paycheck and deposited to the plan based on limits imposed by plan provisions and IRS rules. Your employer may also choose to make contributions to the plan. These plans enable employees to choose various investment accounts including mutual funds, stocks, bonds and money market accounts. 401k plans are offered by for-profit companies, and 403b plans are offered by non-profit companies.
It is your responsibility to decide if you want to participate in the plan and, if so, how much you will contribute each pay period. If you earn $1,000 each pay period and elect to defer 5 percent of your pay, $50 will be taken out of your pay and placed in the retirement plan. These contributions are deducted from your salary on a pre-tax basis. This means that by contributing to a 401k or 403b, you actually reduce your taxable income. For example, instead of being taxed on the full $1,000 per pay period, you are only taxed on $950. You don’t owe income taxes on the money contributed until you withdraw it from the plan.
Participate in Your 401k or 403b
Time is your best ally in reaching your retirement goals. The sooner you start contributing, the better off you are going to be in retirement. Even just one or two percent will make a big difference.
A Retirement Plan is Not a Savings Account
Money placed in a 401k or 403b is not easy to access in an emergency. Some plans allow loans and hardship withdrawals, but the rules governing them are restrictive. Usually, early withdrawals result in heavy penalty fees.
Your Employer Will Provide You With a Summary Plan Description
Read it. It contains lots of good information on how your plan works, what options are available, who the trustees are and other important information. Read all the material your employer provides on the plan. Understand your investment options.
You Have Options if You Leave Your Employer
If you leave your current employer and have a 401k or 403b account, you have the option of rolling over your money into another retirement account of your choice.