Anesthesia training has prepared you for your first job and finally you will be paid to do what you love. What it has not done is instructed you on all the different employer benefits and what they mean. As an employee you will be enrolled in either a 401(k) or 403(b) if it is part of the benefit package. So what are the differences between the two plans?
What are they?
They are retirement plans that are sponsored by your employer. Much like IRAs, they are tax-deferred investment vehicles, meaning they allow the funds to grow over time either tax-free or tax-deferred.
Contributions made to a traditional 401(k) are done so on a pre-tax basis, as they are deducted directly from your paycheck before taxes are taken out. The funds in the account are not taxed until withdrawals are made. At that point, you are only taxed on the amount withdrawn.
In recent years, Roth 401(k)s have become more commonly offered by employers. These work in a similar manner to Roth IRAs, as the contributions are made post-tax from your paycheck. These contributions grow tax-free.
How do they work?
401(k) plans typically provide a variety of investment options within the plan. They are mostly comprised of various mutual fund selections ranging from equity funds, bond funds, target funds and money market funds.
A 401(k) plan also allows for an employer to match your contribution to your account usually up to a certain percentage.
Are there restrictions?
There are certain restrictions and caveats when dealing with 401(k) plans.
In many cases your access to your employer-contributed funds is not allowed until those funds are “vested.” This is set by the plan documents that are usually available through human resources.
Some companies may also restrict you from contributing until you’ve reached specific tenure with the company.
The maximum dollar contribution you can make on an annual basis is also restricted by the government to $19,000 in 2018 ($25,000 if over the age of 50).
If you need to withdraw funds from your traditional 401(k) before the age of 59.5, a 10% penalty on top of any taxes owed may be required. If you have left your company on or after your 55th birthday, you will not be subject to the 10% early withdrawal penalty. A Roth 401(k) withdrawal is a little less restrictive in that you may have access to your money as long as the account has been open for at least 5 years.
401(k) plans are an excellent way to supplement your retirement planning and savings. If your company matches your contribution, this is also an excellent way to take advantage of adding extra funds to your retirement accounts. With the future state of social security unknown, it is an extremely important tool to take advantage of if it is offered to you.
For those of you who work for certain non-profit companies, 403(b) plans may be the retirement account offered to you. These accounts are similar in a few ways to 401(k) plans. Like 401(k)s, there are traditional and Roth 403(b)s. They are also tax-advantaged accounts. However, they do differ in many ways as well.
How do they work?
While some 403(b) plans may provide employer matches, most do not. Contributions are also either made on a pre-tax or post-tax basis (depending on traditional or Roth designation) and grow either tax-deferred or tax-free. The current maximum contribution limits are also the same as 401(k)s, $19,000 or $25,000 if over the age of 50.
What investment options are there?
403(b) investment options are similar to 401(k)s in that mutual funds may be available for selection. Because insurance companies offer many 403(b) plans, options may include fixed or variable insurance products as well.
What about withdrawals?
The same withdraw rules apply to 403(b)s as they do to 401(k)s. If you are allowed by your company to make withdrawals before age 59.5, expect a 10% penalty on top of taxes owed in certain cases. Again, if you have left your company on or after your 55th birthday, you will not be subject to the 10% early withdrawal penalty.
Why contribute to a 403(b) plan?
Although employer matches may not be available for these plans, they are nevertheless excellent vehicles to grow funds tax-deferred or tax-free.
The preceding information is not a complete discussion of all 401(k) or 403(b) qualified retirement plan information or specific information regarding a plan that may be offered by your employer. You should review the plan administration document for additional information. For more complete information on any investment options, including charges and expenses, available within a qualified retirement plan you should review the mutual fund or variable insurance contract’s current prospectus before investing.
This article is for educational purposes and should not be taken as investment advice. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. Hypothetical returns are provided for informational and illustrative purposes and may not reflect actual future performance. Please consult an investment professional for help making your investment selections.
Authors: Team Flaherty Fryer
• Kevin Flaherty and Max Fryer team-based culture is focused on investment advisory, asset management and legacy planning services. Financial Advisors at Folger Nolan Fleming Douglas they have worked with physicians and nurses to meet their financial goals.