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403(b), 401(a), and 457 Plans: What’s the Difference?

Higher ed employees often have many different retirement plan types to choose from. Which should you be using? Should you use more than one?
 
403(b), 401(a), and 457 Plans: What’s the difference? Let’s look at highlights of these plans and how you can optimize your use of them.
 

403(b) Plans: The Popular Kid in School

403(b) plans are the most popular of all higher ed retirement plans. These plans are for employees of public schools and tax-exempt organizations. If you work in higher ed, chances are, you have one. Chances are also pretty good that your provider is TIAA or Fidelity.
 
Institutions normally offer a “match” or a flat rate that they will contribute to the plan on your behalf. You’re ordinarily required to put in a percentage of your own pay, through salary deferral, to receive employer contributions.
 

Highlights:

  • The contribution limit for 2017 is $18,000 if under 50, $24,000 if over 50. These limits will increase by $500 in 2018.
  • Your employee contributions lower your taxable income dollar for dollar.
  • Taxes aren’t paid until you take a distribution. If you use a qualified distribution, you will pay ordinary income tax on the amount. Qualified distributions occur after age 59 ½ but there are a few exceptions.
  • Most plans allow for loans. I don’t encourage using them, but if you exhaust all other options, it is available. (How do 403b Loans Work?)

Pros:

  • Most universities/colleges offer generous employer contributions.
  • Contributions lower your taxable income for that year.
  • Employer matching doesn’t count toward the $18,000 employEE limit.

Cons:

  • Many plans have limited investment options.
  • Use TIAA? Did you know you may not be able to get access to some of your money right away when you retire? If you hold TIAA Traditional, you may want to ask them about it.
  • The recommendations, service, and guidance from 403(b) vendors is inadequate. They claim that they do “financial planning.” Their claims that they offer financial planning is like Comcast telling you they offer “customer service.”
 

457 Plans: The Sidekick

 
457 plans are available to employees of state/local governmental agencies and certain tax-exempt organizations. Some employers offer only a 457 plan. For higher education, you typically only see 457 plans made available alongside 403(b) plans.
 

Highlights:

  • Normally offered only to public school employees.
  • The contribution limit for 2017 is $18,000 if under 50, $24,000 if over 50. These limits will increase by $500 in 2018.
  • Like 403(b)s, contributions lower your taxable income and the growth of the plan is tax-advantaged as well.

Pros:

  • ALSO HUGE: If you separate service, there is NO premature withdrawal penalty. If you want to retire in your early to mid 50’s, this can be a game-changer.

Cons:

  • Not as common as 403(b) plans.

401(a) Plans: The Tag-along

401(a) plans are the least popular of the three. 401(a)s are only offered by government institutions, or in higher ed — public schools. These plans are rarely the core offering. They are a supplemental plan to help you save.
 

Highlights:

  • The employer can decide who is eligible to use the plan.
  • These plans often have mandatory employee contributions.
  • The contribution limit in 2017 is $54,000 (employee+employer).
  • Often, these plans only allow employer contributions.

Pros:

  • As a supplemental plan, it can allow for more tax-advantaged investing, in addition to other plans. The more the merrier!
  • I’ll place this in both Pros and Cons, contributions are sometimes mandatory. While I don’t like being told what to do, many employees wouldn’t invest at all if it wasn’t mandatory.

Cons:

  • These plans are not frequently offered.
  • I’ll place this in both Pros and Cons, contributions are sometimes mandatory. While I don’t like being told what to do, many employees wouldn’t invest at all if it wasn’t mandatory.
 

Conclusion: 403(b), 401(a), and 457 Plans: What’s the Difference?

There you have it. I hope this article helps you remove the guesswork when it comes to the different retirement plans offered in higher education. Optimizing the use of these plans is a key component if you want to live your best financial life.
 

See also:

 
 
Nick Vail is a co-founder and independent financial advisor with Integrity Wealth Advisors in Indianapolis. He started Remove The Guesswork to empower people to stop guessing when it comes to their finances and to start PLANNING. You can learn more about him here. Are you interested in working with Nick?

By | 2017-11-10T11:37:17+00:00 November 10th, 2017|Categories: Higher Education|Tags: , , , |0 Comments

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