Retirement planning offers many options for peace of mind. Spotlighting the 401(k), 403(b), and 457(f) and how a plan manager can help.
401(k)s, 403(b)s, and 457(f)s are vital tools for retirement planners. Some plans are preferred because they’re tax-deferred and any contributions made are deducted from gross annual income, lessening income tax. All of them have advantages that spur savings and investment. We’ve summarized these three programs and provided reasons why having a plan manager who helps implement them is a good idea.
This is America’s most popular choice for retirement planning, with 55 million participants investing $5.7 trillion. The income-tax deduction it offers is among the simplest to understand—any amount contributed to a 401(k) in a year means taxable income is lowered by that amount for the current year.
A major draw of this model is the employer matching that sometimes accompanies it. Such employers will match employee contributions to a 401(k) to a certain percentage limit. The most generous employers can even elect to boost an employee’s plan regardless of the latter’s contributions. 401(k)s are a low-effort, high-flexibility option since contributions are directly deducted from the paycheck and participants can divide their contributions between various stocks and funds.
The maximum amount that employees can contribute is $19,500 for 2020. Catch-up contributions allow those 50 and older to contribute an extra $6,500 a year. When the employer is contributing, the 2020 shared limit is whichever is the lower of 100 percent of employee compensation or $57,000.
Taxes aren’t paid on 401(k)s until withdrawal, which can be deferred until April 1 of the year (or sometimes, the following year) participants turn age 70 and a half. It’s then mandatory to withdraw a certain annual amount under the Required Minimum Distribution Rule (RMD).
Two caveats with 401(k)s: failure to follow the RMD rule sees the amount not withdrawn taxed at 50 percent, and those considered Highly Compensated Employees may find that certain plan restrictions apply, if they’re even eligible.
These plans are available to some employees of public colleges, non-profits, and hospital organizations. 403(b)s share the same annual and catch-up contribution amounts as 401(k)s as well as the employer matching aspect, should the employer elect to offer it.
One difference is generally known as the 15-Year Service Rule. In these cases, some employers offer their staff the chance to contribute an extra $3,000 annually to their 403(b) if they haven’t reached the maximum contribution in previous years and if they’ve been with that same employer for 15 years. This rule comes with a lifetime limit but it’s a simple number to remember: $15,000.
The 2020 limit on annual additions is typically the lesser of $57,000 or 100% of includible compensation for the employee’s most recent year of service. The IRS provides a list of other contributing numbers and factors for investing in 403(b)s in any of the following three ways: an annuity contract provided through an insurance company, a custodial account invested in mutual funds, or a retirement income account set up for church employees.
These are deferred-compensation plans provided by either a local or state government or a tax-exempt organization. 457(f)s have the drawback of being taxable income from the moment of vesting—the giving or earning of the right to a present or future benefit, payment, or asset. They are also subject to a substantial risk of forfeiture, meaning that unless the recipient meets certain performance or time-served criteria, they could lose their plan.
It’s crucial for employees of the entities listed above to understand that taxes are due on their plan. If they don’t, late filing fees and interests will only compound the expense. 457(f)s are designed to supplement the retirement income of eligible executives or other highly compensated employees. Recipients usually find themselves in a lower tax bracket when the plan cashes out since this sum is paid upon retirement.
Deferral amounts aren’t limited but the plan comes with employer-set requirements—such as retirement age—which recipients must meet in order to receive the benefits. Again, both employer and executive may contribute to 457(f)s and administration costs are typically low. Contributions are made with pre-tax dollars and earnings can compound tax-deferred.
How retirement plan advisors can help
The intricacies of retirement planning often require an experienced third party to help recipients make important financial decisions. Retirement plan advisors—also known as co-fiduciaries—are bound both by the law and a duty of trust to act solely in the best financial interests of both their clients and their beneficiaries.
Retirement plan advisors do so by combining their financial expertise, personal insights, and prudence to ensure all requirements of the retirement benefits are met and to diversify the plan’s investments. This duty is limited in the sense that it can only guarantee the best possible organization and execution of a plan. The results of investments are always subject to multiple factors beyond a fiduciary’s control.
If you’re looking for further advice on retirement planning, we’d be happy to assist you. Lindberg & Ripple has been putting the best interests of our clients first for over 40 years. We’re proud to serve those interests by combining our passion for retirement planning with the varied insights of a dedicated team.
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Lindberg & Ripple offers customized wealth management, investment, and insurance solutions to wealthy families and successful businesses. We help our clients craft a comprehensive wealth planning model to achieve their financial goals with minimum fuss and maximum savings. To learn more, connect with us.