Workplace Retirement Plans

401(k) is one of the workplace retirement plans. It allows you to invest money on a pretax basis through a payroll deduction agreement with your employer.

The 401(k) plan is a type of employer-sponsored defined contribution retirement plan under section 401(k) of the Internal Revenue Code in the United States, and some other countries.

It allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. In most cases a 10 percent penalty will be assessed if money is withdrawn before the plan’s owner reaches 59 1/2.

Here is a comparison between 401(k) and traditional IRA:

1- Employer sets up the plan of 401(k), on the other hand individual sets up the plan of IRA.

2- Contributions are deposited as “tax deferred” in 401(k) plan, but they are tax deductible which reduce your tax basis for that tax year in IRA plan.

3- Matching contributions available from employers in 401(k), and no matching contributions available in a case of using IRA plan.

So what about 403(b)?

A 403(b) plan is a tax-advantaged retirement savings plan available for public education organizations, some non-profit employers. It’s offered to employees of public schools and certain tax-exempt organizations.

Unlike 401(k) plans that may allow participants to invest in individual stocks, 403(b) participants are limited to annuity contracts with insurance companies. In 1974, Congress allowed 403(b) participants the option of investing in mutual funds.

What if you can’t change your employer plan? In this case, you should perform an IRS ruling 90-24 asset transfer. Through using this option, the money may be transferred to a financial institution of your choice.

All in all, the 401(k) may be your most important tool because you have more control over it than any pension or Social Security. If it’s used right, your 401(k) can be a terrific tool toward your retirement savings. Just make sure you are the master of how that tool is used.

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