You’ve probably heard of both of these terms, but do you really know the difference between a 403b vs 401k?
Even though in the My Money Deisgn household we have both types of plans, to be honest there was a long stretch of time where I didn’t know what the major differences and similarities were between the 403b or 401k.
So like most things financially, I jotted down some questions and began looking into each one to find out the answers. Below are my notes on what I found out:
Happy New Year everyone! I hope everyone is safe and having a smooth transition into this new start.
It seems this event is always marked with a great deal of optimism because people feel like they have a symbolic marker from which they can wipe the slate clean and start out fresh. It might be eating habits; it might be quitting your bad vices. For me, it always marks a time to re-evaluate our long term financial goals and see if our actions will get us to where we want to be.
What a great time of the year to receive the next installment of my “truly” passive income. By luck, it just so happens that my next series of payments from my dividend paying stocks was scheduled to be paid in December. Couldn’t we all use a little extra cash right before Christmas as the bills start rolling in?
Over on the left are the results of my third batch of quarterly dividend payments received for Quarter 4 (Q4).
Let me see if I can describe how your employer 401k (or 403b, etc) retirement plan orientation went:
• You all walked into a meeting.
• An HR administrator handed you a folder chucked full of loose documents.
• You were released with little direction and told to bring the papers back all filled in.
Am I close?
It’s pretty sad that something so important to our livelihoods later on in life is treated as another routine task. There are many things that should be explained to you when you sign up for your 401k (click here for my complete guide on this topic).
But if there’s one thing where people REALLY need help, it’s deciding which mutual funds to pick for their plan. Past returns? Large cap / small cap? Expense ratios? What does all this stuff mean?
In the MyMoneyDesign household, we have both a 401k and 403b. So let me use what I’ve learned to help steer you towards making the best choices you can make.
We all know that we should be saving more money for retirement, but how do you make that happen? How do you go from nothing to maxing out all our tax-advantaged savings options like your employer sponsored retirement plan or individual retirement account (IRA)?
As I’ve mentioned in previous posts, my wife and I have been on this path for sometime. I’m proud to say that we currently have reached the maximum amount allowed for my 401k and for our Roth IRA’s. It wasn’t easy, but looking back I’m sure glad we did it!
So what steps did we take along the way to get to this point? Here is the strategy we used:
As part of my annual financial checkup, I have updated my “Money Design” for financial freedom. This is my plan to one day automate my income rather than rely solely on employment income. My plan can be summarized by the flow chart below:
If you’re doing a good job of saving up for retirement and looking at the possibility of meeting your goals sooner than later, one of the next biggest hurdles you’ll have to overcome is how to physically get your money out of your retirement accounts.
For most personal accounts such as a 401(k), 403(b), or IRA, you have to wait until age 59-1/2 or get slapped with a hefty 10% penalty fee. There are special exceptions to the 401(k) and 403(b) that may allow you to access your money without penalty by age 55. But even still, what if you are able to retire even sooner than that?
Fortunately, this is where a 72(t) comes in.
A 72(t) is a little-known tax code within the IRS laws that allows an individual under the age of 59-1/2 to take their retirement income out of their retirement account through a series of Substantially Equal Periodic Payments (also called SEPP).
On Friday, the Internal Revenue Service (IRS) announced there will be an increase to the contribution levels for 401(k)’s, 403(b)’s, and the other similar government sponsored retirement plans. The changes will be as follows:
• You can now contribute up to $17,000 (up from $16,500 this year) to eligible plans starting in 2012
• Catch-up contribution limits for the same eligible plans will still remain $5,500 for anyone age 50 and over
• No change to the IRA (Traditional, Roth) contribution limits – $5,000 annually and $6,000 for anyone age 50 and older.
• Roth IRA income limits will be increased by $3,000 to between $110,000 and $125,000 for singles / heads of household and by $4,000 for $173,000 to $183,000 for married couples filing jointly.
• Tax deduction phase-outs for those who contribute to a Traditional IRA
• Increased Saver’s Credit income limits
When you’re creating your “money design”, there are a lot of options for income streams available to you at retirement. Depending on how early you plan to retire, it will be very important to know what the minimum age is you can start withdrawing your funds. The rules may influence the number of options on the table as well as have important legal and penalty implications.
Using irs.gov and several other websites, the following chart is an overlay of all the popular traditional retirement plans and when they can become available.
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