How much do you know about your retirement plan, or retirement plans in general? Questions about these plans come up all the time, and you might be surprised by what you don’t know!
Q: Can I max out my 401k, 403b and 457b? Or am I limited to the $18,000 annual maximum (for 2015) collectively among all three type accounts?
A: While you cannot max out all three, you can max out the 401k or 403b at $18,000/yr AND the 457b at $18,000/yr for a total of $36,000 (2015 maximum) PLUS any catch up contributions.
The IRS rules used to limit you to a total maximum per individual of $18,000/yr, however, those rules changed in the early 2000’s.
Let’s back it up a bit and look into each of the three accounts:
Q: “What is a 401k?”
A: A 401k is a retirement savings plan sponsored by an employer. This plan allows employees to elect to have a portion of their income withheld from their paycheck (before taxes are taken out) to be deposited into their 401k account. This contribution is invested at the direction of the employee and, often, employers will offer a matching contribution. The maximum 401k contribution for 2015 is $18,000, plus any applicable catch up contributions.
As long as the funds remain in the account, the employee does not pay any taxes on those dollars. However, any withdrawals made prior to age 59 ½ may be subject to a 10% early-withdrawal penalty. However, upon reaching age 59 ½, employees are able to make withdrawals penalty free and the dollars are just taxed at ordinary income levels.
Q: What is a 403b?
A: A 403b is very similar to a 401k plan, but they are designed for tax-exempt and nonprofit organizations (schools, hospitals, religious groups, etc). They have the same tax advantages, contribution limits, and early-withdrawal penalties as the 401k plan.
You may find, though, that the investment options with a 403b are slightly more limited than that of the 401k plan and they do not offer employer matching contributions nearly as frequently as 401k plans.
Q: What is a 457b?
A: The 457 plan is a kind of retirement plan offered to state and local governmental employees, as well as certain non-profit organizations. It is similar to the 401k and the 403b in that you can make pre-tax contributions from your paycheck, but the plan differs when it comes to contribution limits and early-withdrawal penalties.
If the 457 plan is the only retirement plan your company offers then the limits are the same as they would be with the 401k or 403b. However, if your employer offers BOTH a 401k/403b and a 457, you may contribute the maximum amount to both plans. Another difference between the 457 and the 401k/403b is that you are not assessed the 10% penalty for early withdrawals. You will have to pay ordinary income tax on the withdrawals, though.
Question: What about the Roth version of each plan?
A: All three types of retirement plans may also allow for Roth contributions. You must check with your specific plan document to determine if your plan allows for this. The Roth contribution will be after-tax however the balance will grow tax-free and qualified withdrawals will also be tax-free.
Do you have any other questions about retirement plans? Feel free to share in the comments!
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