Maybe you’re in a high-flying corporate career, or you’ve dedicated yourself to nonprofit work, teaching or caring for the sick.
Whatever your job, no doubt it reflects your interests and skills. It’s also where you likely can prepare for retirement.
Most private sector employers offer participation in 401(k) plans for good reason. They come with various tax breaks that help workers amass handsome savings over time.
In 2014, individuals can stash up to $17,500 of pre-tax earnings in a plan, and those who are 50 or above can save $23,000. Assets grow tax-deferred, meaning you don’t pay the IRS until you cash out of your 401(k). This enables capital gains and dividends to be reinvested, thereby maximizing growth.
The best part about 401(k) plans? Employers usually contribute to them on behalf of employees. This year, the limit on combined contributions from employers and their workers is $52,000 per individual, or $57,500 for those 50 and older, not to exceed 100 percent of a worker’s total compensation.
Now for the fine print:
- You can borrow from a 401(k), though pros generally advise against it.
- It’s also expensive to tap a 401(k) before age 59 1/2 since you’ll generally owe a 10 percent penalty for withdrawals.
- Hardship withdrawals may be permitted penalty free for dire financial situations, but taxes will be due nonetheless.
- With few exceptions, you must take minimum required distributions from the account by age 70 1/2.
- If you leave your job, you can generally roll your 401(k) into a new employer plan or into a rollover IRA.
Similar to 401(k) plans, but offered to employees at schools, museums and other nonprofits, 403(b) plans have improved, thanks to new rules passed in July 2007.
Individuals can fund 403(b) plans with pretax earnings, up to $17,500 per person in 2014 and $23,000 for those 50 or older if the plan has a catchup provision. Earnings grow tax-deferred. It’s not common for employers to contribute to a 403(b) on behalf of workers. Moreover, 403(b) plans have been criticized in the past for being riddled with hefty fees and for being heavily invested in annuities that don’t generate enough income for individuals to amass adequate wealth.
But new laws governing 403(b) plans now require employers to get more involved with 403(b) plan oversight with the result that many are selecting quality investments targeted to their employees’ retirement goals.
Plans like the 457(b) are offered to state and local government workers and to employees of some tax-exempt organizations such as universities and unions. Like other employer savings plans, 457(b)s are funded with pretax earnings, and assets grow tax-deferred.
Workplace retirement accounts: How they stack up
|Where offered||401(k): Private companies||403(b): Schools, nonprofits||457: Government jobs, tax-exempt organizations|
|Annual contribution limits||401(k): $17,500||403(b): $17,500||457: $17,500|
|Catch up limit||401(k): $23,000||403(b): $23,000||457: up to $35,000*|
|Employer contributions||401(k): Yes||403(b): Yes||457: No|
|Funded with||401(k): pretax earnings||403(b): pretax earnings||457: pretax earnings|
|Earnings grow||401(k): tax-deferred||403(b): tax-deferred||457: tax-deferred|
|Can roll into IRA||401(k): yes||403(b): yes||457: depends on plan|
*Certain eligibility requirements apply.
Individuals must start withdrawing funds by age 70 1/2, and there’s a 10 percent penalty for early withdrawals taken before you’re 59 1/2. That said, you can often avoid the early withdrawal penalty with a 457 because the fee doesn’t apply to someone retiring from a governmental job, even if they’re not yet 59 1/2. Ditto if assets are tapped in the event of extreme financial hardship and unforeseen emergencies.
In 2014, savings limits for 457s max out at $17,500 per person or $23,000 for those over 50. However, 457 plans also come with an extra feature to help older workers save more. Under the so-called “double catch up” provision, someone within three years of retirement can stash up to $35,000 in 2014 if they’ve under-contributed to a 457 in the past. And if your employer offers both plans, you can fully fund both a 457 and a 403(b).
Since 2002, government workers have been allowed to roll 457 assets into an IRA, or to another workplace retirement account such as a 401(k) if that new employer plan allows it. But 457s for tax-exempt organizations can’t be rolled over.