Employers in the public sector and other qualified organizations may offer 403b or 457 plans. Learn more about these plans to see which one is right for you.
Many people are familiarized with 401k plans. These plans are sponsored by employers. These plans are available to qualified employees who can defer part or all of their paycheck before taxes. In certain cases, the employer may match some contributions.
Public-sector institutions at the federal and state levels, like schools, cannot generally offer new plans under the 401k plan. However, this doesn't mean that public-sector workers are left without employer-sponsored retirement savings options. There are two common options: 403b plans and 457 plans. Continue reading to find out more about 457b and 403b plans. Also, learn the difference between them as well as the contribution limits.
The 457 Plan
A 457 plan is one of the best options for public-sector employees. There are two types. You must work in a state or local government to be eligible for a 457 plan. Federal employers cannot offer these plans.
There are two types 457b plans. Tax-exempt and governmental. Sponsorship of governmental 457b plans by the state, local governments, or certain political organizations is possible. Employers that are not state, local or political governments or agencies, but are tax-exempt organizations can sponsor 457b plans. However these plans are restricted to highly-paid employees or managers at the highest levels.
Participation in governmental 457b plans is open to any qualified employee or contractor. These plans don't tax contributions; money disbursed during retirement, or due to other events, is taxed.
You can receive distributions from your 457b plan for certain events:
- When you turn 70 1/2, required distributions begin.
- At 59 1/2, you can start taking optional distributions.
- A qualifying emergency exists or you are in hardship.
- You are not employed by the sponsoring employer when the plan ends.
Early withdrawal penalties are not applicable to 457b plans. You may be subject to a penalty if you withdraw non-457b funds from a plan 457b, such as a 401k, and roll them into a plan 457b.
Non-taxable entities, which aren't state or local employers, can opt for the 457f plan. This plan is only for those in high-paying positions or the top of the management. These plans are usually designed to offer a retirement perk to executives.
457b Plan Contribution Limits
Like other tax-deferred retirement plans 457b plans have contribution limits. You can only transfer a limited amount of your salary to a 457b account each year before taxes. How much depends on your age, how far you are from retirement, and what your contribution limits are.
The 2022 contribution limit for 457b plans is $20,500. This applies to most people. If your salary is less than $20,500, it can be included in the total. Each year, the contribution limits may change. They were $19,500 in 2020 and 2021. This total includes employer matching amounts.
Senior citizens who have not yet made retirement contributions can make greater annual contributions to their 457b plans through the IRS. Two situations allow extra contributions:
- You are in your final three years before retirement. From 2022, you will be able to contribute up to $41,000 annually to a 257b pension plan.
- You are 50 years old or older and wish to contribute to your retirement. You can contribute as much as $27,000 annually starting in 2022.
The 403b Plan
Also known as tax-sheltered annuity plan, 403b plans are available to:
- There are certain types of ministries, churches, and ministers
- Qualifying 501(c), tax-exempt organizations
- Organizations for public education
- States regarding public school teachers
All eligible employees can join a 403b plan if an employer has it set up. Similar to 457b plans contributions to 403b plans below the annual threshold can be made before federal taxes will be deducted. This means that taxes are not paid until the beneficiary takes a distribution. This is usually in retirement, but sometimes earlier.
You can take distributions from your 403b plan at any one of these events:
- You reach 59 1/2 years old (or any time thereafter).
- You are permanently disabled and unable to work, or at the same level.
- Your 403b benefits are transferred to your beneficiary when you die.
- You can leave your employer sponsor for any reason. In this instance, you can roll 403b funds into a qualified retirement fund.
The IRS states that employers who set up 403b plans can create hardship distribution and loan parameters. This is not a requirement. However, employers are allowed to create parameters for hardship distributions and loans. It's important that you read the fine print in your 403b plan to ensure you know if you can access the money with no penalties before you reach retirement age.
403b Plan Contribution Limits
There are several ways to contribute to a 403b program. First, elective deferrals are available. When people talk about retirement plan contribution, this is what they mean. A percentage of your salary is usually withheld from your paycheck to be deposited into your 403b account. This amount is withheld prior to taxes. It is not part of your income for tax calculations.
Employer contributions that are not elective refer to the amount the employer contributes to the fund. This could be a match, for example, your employer may match up 3% of your salary. This could be part of a benefit structure where the employer funds a specific amount of retirement.
After you have met the annual contribution limits, you are allowed to continue making after-tax contributions. These contributions can speed up your retirement fund's growth, but they do not provide tax deferral.
Each year, the IRS establishes contribution limits for 403b plans. The general contribution limit for 403b plans is $20,500 per year in tax-deferred contributions by employees as of 2022. The total contribution of both employer and employee cannot exceed $61,000 annually.
For 403b plans, catch-up contributions can be made. As of 2022, those 50 years old and older can contribute an additional $6,500 annually. Catch-up contributions are also possible for those who have 15 years of service with the exact same employer and same 403b plan. This catch-up limit is $3,000. The maximum catch-up amount allowed in this case is not more than $3,000. This depends on the number of years the individual has served and the amount they have contributed.
Which plan should you choose?
You may not be able to choose whether you wish to join an employer-sponsored, tax-deferred retirement program. Your employer may limit your options. In that case, you need to consider whether you have other options.
To help you choose the right plan for you, it is important to weigh the pros and cons of both 403b or 457b plans.
The pros and cons of 457b plans
The best thing about 457b plans? You can access your funds immediately after you retire or have a qualified emergency.
You can also catch up on your retirement savings by these plans, which allow you to double your contributions over the last three years. You also get the usual catch-up contributions opportunities once you reach 50. If you are a participant in a 457b plan you can roll your funds into a qualified 401k or Roth IRA if your employer is no longer available.
The downside is that any employer contribution counts towards the applicable contribution limits. These plans are less likely to offer great match scenarios, making it more difficult to maximize your retirement savings.
The pros and cons of 403b plans
If your employer contributes, you can usually have a higher annual contribution to a 403b plan. The employer contribution is not counted towards the maximum contribution you can make. In 2022, for example, the maximum amount employees can contribute to a 403b plan was $20,500. You and your employer can each contribute $61,000 annually.
You can make catch-up contributions to a 457b plan. However, you may not be eligible for the maximum 457b plan catch up allowances. If your employer has emergency withdrawal or loan options, you can only access funds in a 403.b plan before age 59 1/2.
How to choose the right plan for you
The 457b plan's catch up contribution limits make it more appealing if you are looking to save more for retirement. If your employer matches your contributions well, you might be able to make more in a 403b plan.
Can you have both a 403b or a 457b?
You can have both a 403b or 457b plan in certain cases. If your employer offers both types, and allows you to contribute to them both, this is possible.
You can maximize your retirement savings by having both types. By diversifying your retirement savings, you can reap the benefits of both plan types while minimizing some of the risks and maximizing the pros.
It is up to you to decide what retirement plan works best for you. You should consider your options, your ability and future financial goals. A single retirement fund won't be enough in many cases to ensure your success in the future. You may want to look at wealth-building and investment opportunities beyond those offered by your employer as part of your retirement planning.
Personal Capital can help you learn more about your options, and to manage your financial life in a way that is more informed.
Frequently Asked Questions
Can I have a gold ETF in a Roth IRA
This option may not be available in a 401(k), but you should look into other options such as an Individual Retirement account (IRA).
A traditional IRA allows for contributions from both employer and employee. An Employee Stock Ownership Plan (ESOP) is another way to invest in publicly traded companies.
An ESOP is a tax-saving tool because employees have a share of company stock as well as the profits that the business generates. The tax rate on money that is invested in an ESOP is lower than if it was held in the employees' hands.
An Individual Retirement Annuity (IRA) is also available. An IRA allows for you to make regular income payments during your life. Contributions to IRAs do not have to be taxable
What are the pros and disadvantages of a gold IRA
An Individual Retirement Account (IRA), unlike regular savings accounts, doesn't require you to pay tax on interest earned. An IRA is a good choice for those who want a way to save some money but don’t want the tax. There are some disadvantages to this investment.
For example, if you withdraw too much from your IRA once, you could lose all your accumulated funds. Also, the IRS may not allow you to make withdrawals from your IRA until you're 59 1/2 years old. A penalty fee will be charged if you decide to withdraw funds.
You will also need to pay fees for managing your IRA. Many banks charge between 0.5%-2.0% per year. Other providers charge monthly management costs ranging from $10-50.
If you prefer your money to be kept out of a bank, then you will need insurance. In order to make a claim, most insurers will require that you have a minimum amount in gold. Insurance that covers losses upto $500,000.
If you choose to have a gold IRA you will need to establish how much gold to use. Some providers limit the number of ounces of gold that you can own. Others allow you the freedom to choose your own weight.
It is also up to you to decide whether you want to purchase physical gold or futures. The price of physical gold is higher than that of gold futures. Futures contracts allow you to buy gold with more flexibility. They let you set up a contract that has a specific expiration.
You'll also need to decide what kind of insurance coverage you want. The standard policy doesn't include theft protection or loss due to fire, flood, or earthquake. It does provide coverage for damage from natural disasters, however. If you live near a high-risk region, you might want to consider additional coverage.
Apart from insurance, you should consider the costs of storing your precious metals. Insurance doesn't cover storage costs. Safekeeping costs can be as high as $25-40 per month at most banks.
If you decide to open a gold IRA, you must first contact a qualified custodian. A custodian helps you keep track of your investments, and ensures compliance with federal regulations. Custodians are not allowed to sell your assets. Instead, they must keep your assets for as long you request.
Once you've chosen the best type of IRA for you, you need to fill in paperwork describing your goals. Information about your investments such as stocks and bonds, mutual fund, or real property should be included in your plan. Also, you should specify how much each month you plan to invest.
After completing the forms, send them along with a check or a small deposit to your chosen provider. The company will review your application and send you a confirmation letter.
You should consult a financial planner before opening a Gold IRA. Financial planners are experts at investing and can help you determine which type of IRA is best for you. They can help you find cheaper insurance options to lower your costs.
Is gold buying a good retirement option?
Although gold investment may not seem appealing at first glance due to the high average global gold consumption, it's worth considering.
Physical bullion is the most popular method of investing in gold. But there are many other options for investing in gold. Research all options carefully and make an informed decision about what you desire from your investments.
If you don’t have the funds to invest in safe places, such as a safe deposit box or mining equipment companies, buying shares of these companies might be a better investment. If you are looking for cash flow from your investment, buying gold stocks will work well.
ETFs allow you to invest in exchange-traded funds. These funds give you exposure, but not actual gold, by investing in gold-related securities. These ETFs typically include stocks from gold miners, precious metallics refiners, commodity trading companies, and other commodities.
What precious metals do you have that you can invest in for your retirement?
Silver and gold are two of the most valuable precious metals. Both can be easily bought and sold, and have been around since forever. These are great options to diversify your portfolio.
Gold: Gold is one the oldest forms currency known to man. It's also very safe and stable. This makes it a good option to preserve wealth in uncertain times.
Silver: Silver is a popular investment choice. It's a good choice for those who want to avoid volatility. Silver tends to move up, not down, unlike gold.
Platinum: A new form of precious metal, platinum is growing in popularity. It's durable and resists corrosion, just like gold and silver. It is, however, more expensive than its competitors.
Rhodium: The catalytic converters use Rhodium. It is also used as a jewelry material. And, it's relatively cheap compared to other types of precious metals.
Palladium: Palladium, which is a form of platinum, is less common than platinum. It is also cheaper. Investors looking to add precious and rare metals to their portfolios love it for these reasons.
- Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)
- You can only purchase gold bars at least 99.5% purity. (forbes.com)
- (Basically, if your GDP grows by 2%, you need miners to dig 2% more gold out of the ground every year to keep prices steady.) (smartasset.com)
- Gold is considered a collectible, and profits from a sale are taxed at a maximum rate of 28 percent. (aarp.org)
- The price of gold jumped 131 percent from late 2007 to September 2011, when it hit a high of $1,921 an ounce, according to the World Gold Council. (aarp.org)
- 7 U.S. Code SS7 – Designation board of trade as contract marketplaces
- 26 U.S. Code SS 408 – Individual retirement accounts
A rising trend in gold IRAs
As investors look for ways to diversify their portfolios and protect themselves against inflation, the gold IRA trend is on the rise.
The gold IRA allows investors to purchase physical gold bars and bullion. It can be used as a tax-free way to grow and it is an alternative investment option for people who are not comfortable with stocks or bonds.
Investors can manage their assets with a gold IRA without worrying about market volatility. They can use the gold IRA to protect themselves against inflation and other potential problems.
Investors also get the unique benefits of owning physical Gold, including its durability, portability, flexibility, and divisibility.
Additional benefits of the gold IRA include the ability to quickly pass ownership to heirs. Additionally, the IRS does not consider gold a money or a commodity.
All this means that the gold IRA is becoming increasingly popular among investors seeking a haven during financial uncertainty.
By: Personal Capital
Title: 403b vs. 457: What’s the Difference?
Sourced From: www.personalcapital.com/blog/retirement-planning/403b-vs-457/
Published Date: Tue, 06 Dec 2022 00:17:07 +0000