Leveraging higher education retirement plans yields great value if done correctly. However, many complicated questions need answers. Should you save in a 403(b), 457, or IRA? Do the plans have different features? What about Roth choices? What if I lose my job?
Here, information will be shared to help make the complicated world of retirement planning simple.
Retirement plan choices.
403(b) – Scott Dauenhauer notes in his book, “Wild West: Providing Fiduciary Advice to Public School Employees”: “The 403(b) was codified into law with the Technical Amendments Act of 1958 and was more of a pre-tax, tax deferred ‘program’…” (1). This took place before the Revenue Act of 1978, setting up the 401(k) (2) and the Employee Retirement Income Security Act (ERISA) of 1974 establishing the IRA (3). The 403(b), also called a tax-sheltered annuity, is for “certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers” (4). The IRS notes (4):
Individual 403(b) accounts will be opened up as one of the following types.
- An annuity contract, which is a contract provided through an insurance company.
- A custodial account, which is an account invested in mutual funds.
- A retirement income account set up for church employees. Retirement income accounts can invest in either annuities or mutual funds.
As with its cousin, the 401(k), participants may contribute up to $18,000 for 2016, plus another $6000 if over the age of 50.
457 – The 457 is a special plan available to local and state employees (and other 501(c) groups). The 457 has the same contribution limits as the 403(b) and 401(k). A few key differences as noted by 403bwise.com are:
- Assets in a 403(b) are held directly by employees, while 457(b) assets are held in a trust for the benefit of employees.
- There is no federal 10 percent premature distribution penalty imposed on withdrawals from a 457(b) plan when separating from service.
Additional catch-up contributions accompany the plan (5).
- Two times the current year’s normal retirement contribution limit, or
- Underutilized limits from past years. Note: Not all employers make this additional catch-up option available, nor are they required to do so. Check with your employer for details.
401(a) – Investopedia notes, “A 401(a) plan is a retirement savings plan normally offered by government institutions rather than by corporations. These plans are usually custom-designed and are only offered to key government employees as an added incentive to stay with the organization. The contribution amounts are normally set by the employer and are mandatory” (6).
Normally, each of the listed plans allows the participant to save money on a tax-deferred basis, with the tax benefit being realized now by seeing a reduction in income for the contribution amount. However, the new Roth provisions allow participants to put away money which has been taxed now and allow the money to grow tax-free. In this provision, tax diversification may be incorporated into a portfolio where the benefactor creates flexibility by hedging future tax rate changes. (Click here for a better understanding of tax diversification.) The Purdue plans allow for the Roth option on the 403(b) plan (7). Additionally, participants can save in multiple plans.
By creating a tax-diversified and investment-diversified plan, retirement planning will now be flexible.
- Review your current plan for opportunities to improve your retirement picture by
creating additional flexibility.
- Call me at 317-805-0840 or email me at email@example.com with questions or to review options.
- “Traditional IRA.” Wikipedia. Wikimedia Foundation, n.d. Web. 22 June 2016.
- “Your 401(k): When It Was Invented-and Why.” LearnVest. N.p., 3 July 2013. Web. 22 June 2016. <https://www.learnvest.com/knowledge-center/your-401k-when-it-was-invented-and-why/>
- “Traditional IRA.” Wikipedia. Wikimedia Foundation, n.d. Web. 22 June 2016. <https://en.wikipedia.org/wiki/Traditional_IRA>
- “Publication 571 (01/2016), Tax-Sheltered Annuity Plans (403(b) Plans).” Publication 571 (01/2016), Tax-Sheltered Annuity Plans (403(b) Plans). Interna Revenue Service, n.d. Web. 22 June 2016. <https://www.irs.gov/publications/p571/ch01.html>
- Otter, Dan. “Wise Information for K‑12 Employees.” Other Plan That May Be Available: 457(b). 403bwise, n.d. Web. 22 June 2016. <http://403bwise.com/k12/content/18>
- “What Is the Difference between a 401(a) and a 401(k)? | Investopedia.” Investopedia. N.p., 2015. Web. 22 June 2016. <http://www.investopedia.com/ask/answers/060215/what-difference-between-401a-and-401k.asp>
- Snapshot of Purdue University Retirement Programs. West Lafayette: Purdue U, n.d. <http://www.purdue.edu/hr/Benefits/currentEmployees/retirement/pdf/Snapshot_Retirement_programs.pdf>