With the different features and benefits that apply to the various types of retirement accounts and plans, it is best to choose one that is most suitable for your long-term needs. However, picking the right plan can be tricky.
Below is a brief summary of three common retirement plans:
401 K Plan
Under this plan, retirement savings contributions are provided (and sometimes proportionately matched) by an employer, deducted from the employee’s paycheck before taxation (therefore tax-deferred until withdrawn after retirement or as otherwise permitted by applicable law) and limited to a maximum pre-tax annual contribution of $20,500, or $27,000 if you are 50 years and older, as of 2022.
403 B Plan
For-profit corporations can allow their employees to participate in a 401 K plan.
However, nonprofit organizations such as those working for a charity or certain ministries may have the ability to save for retirement and be allowed to participate in 403 B plans. Organizations can offer these plans that are also tax deferred and tax sheltered, which means the account grows tax-free.
You can use the money in a 403 B to invest in mutual funds and withdrawals can be taken from the account after the employee turns 59 and 1/2 years old or if the employee retires after turning 55 years old. Early withdrawal is subject to a 10% penalty.
A non-qualified tax advantaged deferred-compensation retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis.
They work much the same way as a 401 K; you can choose to send part of your salary into the plan and the money is automatically deducted from your paycheck before taxes are taken out. Unlike the 401 K plans and 403’s, you do not have to pay a withdrawal penalty if you withdraw early but you will owe income tax on that withdrawal.
Want to learn more about life insurance? Read our article The Most Frequently Asked Life Insurance Questions.