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401(k) Isn’t Your Only Option

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This article was last updated Oct 09, 2017, but some terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the issuer website.

When you think about retirement accounts, chances are the first thing to come to mind is either a 401(k), an IRA plan, or a Roth IRA plan. IRA simply stands for an individual retirement account, so a Roth IRA is almost the same thing, with a few differences. The difference between a Roth IRA and an IRA is that with a Roth IRA, you can’t deduct contributions, qualified distributions are tax-free, you can make contributions to your Roth IRA past the age of 70 ½, and balances can be left in the account as long as your still living. Some of the below plans are defined-benefit plans or defined contributions plans. A defined-benefit plan (DB) is an employer-sponsored retirement plan where the employee's benefits are based on a formula using factors such as salary history and duration of employment. Investment risk and portfolio management are controlled by the company. A defined-contribution plan (DC) is a retirement plan where a certain percentage amount is set aside by the employer for the benefit of the employee. Both plans come with restrictions on withdrawing funds.

Let’s take a look at a few retirement accounts that are available, starting with the one we are most familiar with:

Traditional 401(k) Plan-This is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their pre-tax wages towards individual accounts. Deductions are made automatically and before taxes are withheld. Employers also have the option to make contributions on behalf of all participants, making contributions based on employees’ elective deferrals, or both. There are other types of 401(k) plans, which is why this definition is stated as a traditional 401(k) plan. Others are called a safe harbor 401(k) plan and a SIMPLE 401(k) plan.

401(a) Plan-Only certain professions may be eligible for this plan, such as government employees, employees of a state or political subdivision (or its agency or instrumentality), and also for Indian tribal governments, or its subdivision (or its agency or instrumentality). It’s also available to both for-profit and nonprofit organizations. This plan is a money-purchase retirement savings plan that’s set up by an employer, and, similar to a 401(k), allows for contributions from the employee, employer, or both. Contribution amounts can be either a percentage or a dollar-based amount. Mandatory contributions from the employee are usually pre-tax, while voluntary contributions are post-tax. This type of plan is a DC plan and sometimes used as a way to retain employees.

403(b) Plan– This plan covers those employed by public schools, certain tax-exempt organizations, and certain ministers. It is also similar to a 401(k), but may only be obtained under an employer’s Tax Sheltered Annuity plan (TSA) plan. Benefits to this plan includes the ability to hold off on paying income tax on allowable contributions until you begin making withdrawals, earnings and gains on your account aren’t  taxed until you withdraw them, and you may be eligible to take credit for elective deferrals contribute to your account.

457(b) Plan– Only those that are a state or local government may establish this type of plan, and also any tax-exempt organization under IRC 501(c). A 457(b) plan is a DC plan, and a portion of your salary is contributed to your retirement account. Accumulated funds are not taxed until they are withdrawn, and therefore, contributions and earnings to your 457(b) are tax-deferred. There are differences to a 401(k) and a 457 plan, which may be viewed here.

Thrift Savings Plan (TSP) This is a Federal Government-sponsored retirement savings and investment plan. Coverage is for federal employees, including Federal civilian employees and members of the uniformed service. A TSP plan offers the same type of savings and tax benefits as do 401(k) plans, but it is a long-term retirement savings plan, not short-term, which means penalties for early withdrawals do apply. A TSP plan offers five basic funds and is relatively cheap. Contributions to this kind of account are matched by the General Service Administration (GSA) and employee contributions are automatically withdrawn from your pay.

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