403(b), 457(b), 401(k), IRA & ROTH -
What are These Accounts?
Immediate Benefits: Saving in a 403(b), or other supplemental retirement savings account may decrease the amount of taxes you pay each paycheck.
Save on Taxes - How?: Any money you save under one of these tax codes is tax deferred, meaning you are putting off paying taxes on those funds until you withdraw them in retirement. So you don't pay taxes on your savings as long as the money is in the account. (There is a type of account that allows you to pay taxes when you deposit the funds so that you don't pay taxes later. This is important if taxes are expected to increase in the future. Learn more about that here - "Roth: Simple Definition")
Long Term Benefits: Each individual has a unique set of circumstances. However there is one general truth regarding Pension and Social Security income - it is typically LESS than a person's working salary. If you want to retire and still have the same income as the day you retired, you will need to save additional money. 403(b), 457(b), IRA and 401(k) accounts give you the opportunity to save money on taxes and potentially earn higher interest than a standard savings account or CD.
How can saving in a 403(b), 457(b), IRA or 401(k) help me?
To learn more details regarding 403(b) contributions and limitations please see the IRS description here: https://www.irs.gov/retirement-plans/irc-403b-tax-sheltered-annuity-plans
How much money can I protect from taxes in a 403(b)?
As of 2023 an employee is able to shelter $22,500 per year. Employees who are age 50 or over at the end of the calendar year can also make additional (or catch-up) contributions of $7,500 for a total of $30,000. (If your employer is contributing to your 403(b) plan, the limits can reach as high as $66,000 per year.)
How can saving in a 403(b) help me?
With variation, the same goals are met with a 403(b) as with other supplemental retirement savings - they both lower your tax bill during working years and provide additional funds to fill the shortfall of pension and Social Security payments. For a brief explanation of how these plans help you please see the section above titled "How can saving in a 403(b), 457(b), 401(k) or IRA help me?"
403(b) Simple Definition:
A 403(b) is yet another type of retirement savings account, similar to the 457(b), IRA and 401(k) that we will talk about on this page. The 403(b) is a retirement savings account designed for employees of non-profit organizations, schools, and certain religious organizations. It lets you save money directly from your paycheck, invest it to make it grow, and keep it safe from taxes until you retire.
403(b) how does it work?
Who Can Use It: If you work for a non-profit organization, school, or certain religious groups, you may be eligible for a 403(b) plan. It's like a special savings account made just for people who work in these types of places.
Contributions: With a 403(b), you can set aside a part of your paycheck to go into the account. The good thing is that the money you put in is taken out of your salary before taxes are calculated, so you might pay less in taxes right now.
Investment: The money you contribute to your 403(b) doesn't sit idle. You have options to invest it in different things like mutual funds or annuities. These investments have the potential to grow over time.
Tax Advantage: Like the other retirement accounts we talked about, the 403(b) has a tax advantage. You won't pay taxes on the money you put in or the money it earns until you take it out during retirement. This helps your savings grow faster.
Withdrawals During Retirement: You can't take the money out whenever you want; it's meant for retirement. Once you reach a certain age (usually around 59½), you can start withdrawing money from your 403(b) account. The money you take out will be taxed as regular income.
No Penalties for Early Retirement: Just like the 457(b), the 403(b) allows you to withdraw money without penalties if you retire before the normal retirement age (around 59½). But remember, you'll still have to pay taxes on the money you withdraw.
To learn more details regarding 457(b) contributions and limitations please see the IRS description here: https://www.irs.gov/retirement-plans/irc-457b-deferred-compensation-plans
As of 2023 an employee is able to shelter $22,500 per year. Employees who are age 50 or over at the end of the calendar year can also make additional (or catch-up) contributions of $7,500 for a total of $30,000. Note: Employers do not have the option to match or contribute under the 457(b) tax code.
How can saving in a 457(b) help me?
The same benefits exist with a 457(b) as with a 403(b) - they are additional retirement savings that both lower your tax bill during working years and provide additional funds to fill the shortfall of pension and Social Security payments. For a brief explanation of how these plans help you please see the section above titled "How can saving in a 403(b), 457(b), 401(k) or IRA help me?"
How much money can I protect from taxes in a 457(b)?
457(b) Simple Definition:
A 457(b) is another type of retirement savings account, just like the 403(b) we talked about earlier. It's a way for certain employees, typically government, school or non-profit workers, to save money for their future when they retire.
In a nutshell, the 457(b) is a retirement savings account for specific government and non-profit workers. It lets you save money from your paycheck, invest it to make it grow, and keep it safe from taxes until you retire. Just like the 401(k), it's all about planning for a better future when you're no longer working. Start saving early, and you'll have more money to enjoy during your retirement years.
How does a 457(b) work?
Who Can Use a 457(b): If you work for a government employer (like a school, city, state, or federal agency) or a non-profit organization, you might be eligible for a 457(b) plan. It's like a special savings account only available to certain types of workers.
Contributions: Just like the 403(b), you can put a portion of your salary into the 457(b) account. The good news is, this money is taken out of your paycheck before taxes, so you may pay less in taxes right now. As of 2023 an employee is able to shelter $22,500 per year.
Investment: The money you contribute to your 457(b) doesn't just sit there doing nothing either. You can invest it in different things, like an annuity or even stocks or bonds. These investments have the potential to grow over time. You will need to think about what level of risk you are comfortable with before deciding what type of account you place your savings in.
Tax Advantage: One of the big benefits of a 457(b) is that you won't pay taxes on the money or its growth until you withdraw it during retirement. This helps you keep more money in your account to work for you.
Withdrawals during Retirement: Just like the 403(b), you can't take the money out whenever you want. The idea is to let it grow until you retire. Once you reach a certain age (usually around 59½), you can start taking money out of your 457(b) account. The money you withdraw will be taxed as regular income.
No Penalties for Early Retirement: Here's a cool thing about the 457(b) - If you retire before the normal retirement age (around 59½), you can withdraw money from your account without any penalties. But remember, you'll still have to pay taxes on the money you take out.
A 401(k) is a type of retirement savings account that many people use to save money for their future when they stop working (retire). It's like a piggy bank where you can put away a portion of your earnings over time to grow and use later in life. Remember, a 401(k) is a long-term savings tool, so it's not meant for short-term needs. It's all about putting money away now to secure a more comfortable future when you stop working. The sooner you start contributing, the more time your money has to grow.
To learn more details regarding 401(k) contributions and limitations please see the IRS description here: https://www.irs.gov/retirement-plans/plan-sponsor/401k-plan-overview
How can I get the most of my 401(k) plan?
If your employer offers a 401(k) retirement plan and makes contributions to it on your behalf, you have a serious advantage in retirement investing because hey - free money! Try to contribute enough to get the full employer matching contribution. Use all of the retirement planning tools that your employer or plan provider offers to help develop and track your retirement plan. Take any company stock your employer gives you, but don’t invest your own money in it. Remember Enron. Roll your retirement money directly into a new tax-deferred (That means you don't pay taxes now, you pay when you withdraw funds in retirement) account when you change jobs. Don’t cash it out. Finally, don’t take a hardship withdrawal or loan unless absolutely necessary.
How does a 401(k) work?
Contributions: When you have a job, you can choose to put a part of your paycheck into your 401(k) account. This money is taken out before taxes are calculated, so you might pay less in taxes now. It's like setting aside money for later.
Investment: The money you put into your 401(k) doesn't just sit there doing nothing. You can choose to invest it in different options like stocks, bonds, or mutual funds. These investments have the potential to grow over time.
Growth: As your investments grow, the money in your 401(k) can increase over the years. It's like your piggy bank earning interest or becoming bigger without you having to put in extra money.
Tax Advantage: One of the biggest benefits of a 401(k) is that you don't pay taxes on the money and its growth until you take the money out during retirement. This means more money can stay in your account and work for you.
Employer Match (Sometimes): Some employers offer a 401(k) match, which means they'll put in extra money into your account on top of what you're saving. It's like getting free money for your retirement savings.
Withdrawals During Retirement: You can't take money out of your 401(k) whenever you want. The idea is to keep the money there until you retire. Once you're retired and reach a certain age (usually around 59½), you can start taking withdrawals from your 401(k) account. The money you take out is then taxed as regular income.
Remember, a 401(k) is a long-term savings tool, so it's not meant for short-term needs. It's all about putting money away now to secure a more comfortable future when you stop working. The sooner you start contributing, the more time your money has to grow.
401(k) Simple Definition:
How can saving in a 401(k) help me?
The same goal applies to using a 401(k) as with a 403(b), 457(b) or IRA - they are additional retirement savings that both lower your tax bill during working years and provide additional funds to fill the shortfall of pension and Social Security payments. For a brief explanation of how these plans help you please see the section above titled "How can saving in a 403(b), 457(b), 401(k) or IRA help me?"
Individual Retirement Account (or Individual Retirement Arrangements). An IRA is a retirement savings account for individuals. It helps you save for retirement with potential tax benefits, and you can choose how to invest your money. It's like a piggy bank that you use only for your future, and it comes with some tax advantages.
Just remember, the money is for your future, so it's best to leave it there until retirement to make the most of its benefits.
To learn more details regarding IRA contributions and limitations please see the IRS description here: https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras
The same benefits exist with an IRA as with a 403(b), 457(b) or 401(k) with some variations - they are additional retirement savings that both lower your tax bill during working years and provide additional funds to fill the shortfall of pension and Social Security payments. For a brief explanation of how these plans help you please see the section above titled "How can saving in a 403(b), 457(b), 401(k) or IRA help me?"
How does an IRA work?
IRA Simple Definition:
How can saving in an IRA help me?
Individual Account: The "I" in IRA stands for individual, which means it's just for you. You open and manage this account on your own, separate from any retirement plan your employer might offer.
Contribution Limits: For 2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:
$6,500 ($7,500 if you're age 50 or older), or
If less, your taxable compensation for the year
Saving for Retirement: The main purpose of an IRA is to save money for when you stop working and retire. It's like setting aside money now to have a comfortable future later.
Tax Benefits: One of the best things about an IRA is that it can give you some tax advantages. There are two main types of IRAs: Traditional IRA and Roth IRA.
Traditional IRA: When you put money into a Traditional IRA, you may be able to deduct that amount from your income when you file your taxes. This means you pay less in taxes right now. However, when you take money out during retirement, you'll have to pay taxes on what you withdraw.
Roth IRA: With a Roth IRA, you don't get a tax deduction for the money you put in now, but the money you withdraw during retirement is tax-free. It's like paying taxes upfront to enjoy tax-free withdrawals later.
Investment Choices: Inside your IRA, you can invest your money in different options, such as stocks, bonds, mutual funds, or other investments. The goal is to make your money grow over time.
Retirement Age and Penalties: You can't take money out of your IRA whenever you want. The idea is to keep the money there until you retire. If you take money out before a certain age (usually around 59½), there might be penalties and taxes on the amount you withdraw.
ROTH Simple Definition:
A Roth IRA, stands for Roth Individual Retirement Account. It's a special type of savings account designed to help you save money for your retirement in a smart and tax-free way. The Roth IRA is a retirement savings account that lets you save money for the future without worrying about taxes on the growth. It's like a tax-free piggy bank for your retirement goals, giving you the freedom to enjoy your savings during retirement without any tax worries. There are ROTH versions of 403(b), 457(b), IRA and 401(k). However these may not be available to you, you will need to check with your employer.
Roth IRA: (Very) Brief History
Originally called an "IRA Plus", the idea was proposed by Senator Bob Packwood of Oregon and Senator William Roth of Delaware in 1989. established by the Taxpayer Relief Act of 1997 (Public Law 105-34) and named for Senator Roth.
Senator William Roth, co-creator of the ROTH IRA
How does a Roth IRA work?
Saving for Retirement: The main purpose of a Roth IRA is to save money for your future, specifically for when you stop working and retire. It's like a piggy bank for your retirement goals.
Tax-Free Growth: The big advantage of a Roth IRA is that any money you put into it has already been taxed. This means you won't have to pay any taxes on the money you withdraw during retirement. It's like planting seeds now and not having to pay any taxes on the harvest later.
No Tax Deduction Now: Unlike some other retirement accounts, like Traditional IRAs or 401(k)s, the money you put into a Roth IRA doesn't give you a tax break right now. It's like putting money into your piggy bank after you've already paid taxes on it.
Investment Choices: Inside your Roth IRA, you can choose different things to invest in, like stocks, bonds, mutual funds, or other investments. The goal is to let your money grow over time, potentially becoming more valuable.
Withdrawals During Retirement: The best part is that when you retire and want to take money out of your Roth IRA, you won't have to pay any taxes on it. It's like being able to enjoy your piggy bank savings without having to give a portion of it to the government.
Flexibility: Another great thing about a Roth IRA is that you can take out the money you originally put into it (not the earnings) without any taxes or penalties, even before retirement if you need it for emergencies or important expenses.
How can saving in a Roth IRA help me?
Generally, it is assumed that taxes will be higher when you go to retire as opposed to present day. So if you pay the taxes on your retirement savings now, you will potentially be paying even less in taxes, if tax rates rise by the time you retire.
However, nobody can predict what taxes will be like 30 years from now. Consider this hypothetical example: If you invested solely in Roth accounts in 1991 you would have paid more in taxes than if you had waited to pay taxes at retirement. It may be wise to invest a portion of your supplemental retirement savings across a traditional IRA and a Roth IRA. A balanced approach that considers multiple retirement savings vehicles might be the most suitable strategy for your individual circumstances.
It's essential to consider that tax laws and regulations may change over time, and new types of Roth IRAs or modifications to existing ones may be introduced. Consult a financial advisor or tax professional for the most up-to-date information and guidance on Roth IRAs.
Disclaimer:
The intent of this website is to simplify the complex, complicated and sometimes confusing explanations that often accompany tax codes, pension standards or other financial jargon. In no way does LegacyRetirementGoals.com claim ownership or otherwise claim to be the express authority on any stated subject matter on any page or blog produced and shared on this site. Further, LegacyRetirementGoals.com, it's owners and/or affiliates do not work for TSERS, FERS or any other government agency.
