If you work for a university or college, there is a good chance you have many different types of retirement plans to choose from.
403(b), 401(a), 457 Plans: what’s the difference and how can you optimize using them?
403(b) Plans
403(b) plans were created in the 1950s as a way for teachers and others who work for not-for-profit organizations to save for retirement. The name comes from the section of the tax code the plan was created under.
Institutions normally offer a “match” or a flat rate that they will contribute to the plan on your behalf. You’re ordinarily required to put in a percentage of your own pay, through salary deferral, to receive employer contributions.
Features:
- The contribution limit for 2019 is $19,000 if under 50, with a $6,000 catch-up contribution if over 50 for $25,000.
- You are responsible for choosing the investments within your account.
- Most plans allow for loans. I don’t encourage using them, but if you exhaust all other options, it is available.
Pros:
- Most universities/colleges offer employer contributions.
- Traditional contributions lower your taxable income for that year.
- Many Plans also offer after-tax (Roth) contributions.
Cons:
- Many plans offer insurance-based products (annuities) as part of the core line up. These products often have high fees which can be detrimental to long-term financial success.
- The recommendations, service, and guidance from 403(b) vendors can be inadequate because they are often insurance salespeople who receive large commissions for selling insurance products within the 403(b).
457 Plans
457 plans are available to employees of state/local government agencies and certain tax-exempt organizations.
features:
- The contribution limit for 2019 is $19,000 if under 50, with a $6,000 catch-up contribution if over 50 for $25,000.
- Like 403(b)s, you are responsible for choosing the investments within your account.
Pros:
- If a 403(b) and 457 Plans are offered, you can max out BOTH.
- If you separate service, there is not a 10% premature withdrawal penalty. This can be especially beneficial if you want to retire in your early to mid-50s.
Cons:
- While premature withdrawal penalties don’t apply after separating service, required minimum distributions do apply.
- The 457 plan doesn’t have a match.
- If the 457 is considered non-governmental, your options for what to do with the funds down the road, such as rolling it into an IRA, can be limited.
401(a) Plans
A 401(a) plan is an employer-sponsored money-purchase retirement plan that allows dollar- or percentage-based contributions from the employer, the employee, or both.
Features:
- The employer can decide who is eligible to use the plan.
- These plans often have mandatory employee contributions.
- The contribution limit in 2019 is $56,000 (employee+employer).
Pros:
- It can allow for more tax-deferred investing, in addition to other plans.
Cons:
- These plans are not frequently offered.
- The plan gives employers more control over their employees’ investment choices.
- Contributions are sometimes mandatory and a portion of those contributions may be subject to a “mitigating rate” that is used to help fund past service liabilities of the organization’s defined benefit plan.
How to use them together
If you work for an employer that offers all three plans, you are in luck because you can contribute to all three plans at the same time!
A quirk in the IRS code allows you to personally defer $19,000 to the 403(b) plan, $19,000 to the 457 plan, and $19,000 to the 401(a) plan.
If you include employer contributions, a total of $131,000 can be contributed toward your retirement, before any catch-up contributions!