The easiest way to start saving for retirement is through a work place retirement plan. Having an employer-sponsored retirement savings plan is a key factor in whether Americans save for retirement. Only 18% of those without access to an employer-sponsored plan said they have any retirement savings.
But just because your employer offers a retirement plan, DOES NOT mean that you should blindly start piling money into it. You need to know what you’re getting yourself into. What type of plan is it? What are the requirements? What are the rules? What investment options are in the retirement plan? Are they what’s right for your situation?
The 401(k) is the most popular type of retirement plan if you work in the private sector. In this post, we’re going to cover two popular types of work place retirement plans for those in the public sector, the 457 plan and the 403(b).
Much like a traditional 401(k) plan, 403(b) and 457(b) plans allow you to put aside tax-deferred money into different types of investments for retirement. We’ll explore both plan types below to help you decide the best way to put aside money for retirement.
How to Save for Retirement: 457 Plan vs. 403(b)
403(b) plans are offered by public schools and certain non-profit, tax-exempt organizations. 403(b) plans may also be referred to as a TSA plan (tax-sheltered annuity) or a TDA plan (tax-deferred annuity). When these plans were created, investing in annuities was the only option. However, many 403(b) plans have now expanded to include mutual fund investment options as well.
The annual contribution limit for 403(b) plans for 2021 is $19,500, with an option to invest an additional $6,500 in catch-up contributions for employees who will be age 50 years or older by the end of the calendar year. While a 403(b) is funded primarily by the employee, employers may also choose to match contributions.
Contributing to a 403(b) may incur higher administrative costs than a 401(k). Investment fees are typically paid for by the employee, but employers can opt to pay some or all of the administrative fees. Review your paperwork carefully to determine what fees, if any, you may be responsible for.
403(b) plans are notoriously expensive, in terms of investment costs.
While the space is improving and becoming more “investor friendly” there are frankly too many high cost investments in 403(b) plans. Generally speaking, the more the investments cost, the worse they are for you. The investment fees are often hard to find. And it can be difficult to decipher just how much you are paying for the investments.
Be cautious here, and if you need advice please feel free to reach out.
457(b) plans are offered by state and local governments, as well as select 503(c) non-profit companies. The investment options for 457(b) plans also include annuities and mutual fund investment options.
Much like the 403(b) plan, the annual contribution limit for 457(b) plans for 2021 is $19,500. If a plan participant is within three years of normal retirement age, they may also participate in additional catch-up contributions. Normal retirement age is defined as being between ages 65-67 years, but with IRS approval can be as low as 62 years old. Confirm with your employer as to what they consider normal retirement age to determine if you’re eligible for additional contributions.
Your additional investment amounts can either be twice the annual limit, for a total annual contribution limit of $39,000 or the basic annual limit plus the amount of the basic limit not used in prior years. The latter option is only available if the participant is not using the 50 and over catch-up contributions.
Your employer may offer one or both of these types of plans. There may also be an option to invest in a designated Roth account, depending on the available options.
Knowing the stipulations of your work place retirement plan BEFORE you start investing in it is absolutely crucial. We tell folks all the time, that just because it is available to you doesn’t necessarily mean you should be maxing it out every year.
It’s also important, especially if you’re younger, to focus on your cash flow situation and not put the cart before the horse. Meaning, you don’t want to have this money tied up until your aged 59 1/2 if you’re going to need it. Paying down debt, keeping expenses low and planning for big purchases (like buying a home) also have to factor into this equation.
Financial planning is so much more than just socking away as much as possible for retirement.