A typical retirement savings account is a 401(k). Employers are most likely to use this traditional retirement savings account for their employees. There are other options including a 403(b) and a 457(b) that are less known to the average person. A 403(b) plan is offered to employees of private nonprofit organizations and government workers. These are employer sponsored plans as well. Continue reading to learn the differences between these three accounts and see what works best for you.
With a 457(b) plan, you are allowed to contribute $19,500 in the tax years of 2020 and 2021. If you are 50 or older, you can contribute an extra $6,500 in 2020 and 2021. If you are within three years of retirement age, you are allowed to contribute up to $39,000. It is limited by previous contributions, but still allows you to catch up on your retirement goals.
403(b) plans are offered to employees of private nonprofits and government workers. These plans are a type of defined contribution that allows participants to shelter money on a tax-deferred basis. The annual contribution limit is $19,500 for 2020 and 2021. If you are over the age of 50, you are allowed to contribute an extra $6,500. This plan offers additional catch-up abilities, known as the 15 year rule. Employees who have at least 15 years of tenure are eligible for this ability to contribute an extra $3,000 per year. This provision has a lifetime limit of $15,000. The total contribution from employer and employee cannot go over $57,000 for 2020 and $58,000 for 2021.
401(k) plans are offered to employees of private, for profit employers and some nonprofit employers. Employers with 401(k) plans may make matching contributions on behalf of employees. Earnings in this type of account accrue on a tax-deferred basis. There are many types of investment options for the participant to choose from. In 2021, the maximum annual contribution limit is $19,500. For people over the age of 50, they are allowed another $6,500 in additional contributions. The withdrawal age without penalty is 59 ½ years of age, unless it is for a financial hardship.
Which type of plan you have depends on your employers. If you have switched jobs in different industries, you may have one of each account. It is important to keep track of your retirement savings so you can reach your goals for retired living.