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| Retirement Plans |
What is Retirement Plans?
A 401(k) plan is a retirement savings plan that is funded by employee contributions and (often) matching contributions from the employer. The major attraction of these plans is that the contributions are taken from pre-tax salary, and the funds grow tax-free until withdrawn. Also, the plans are (to some extent) self-directed, and they are portable; more about both topics later. Both for-profit and many types of tax-exempt organizations can establish these plans for their employees. A 401(k) plan takes its name from the section of the Internal Revenue Code of 1978 that created them. To get a bit picky for a moment, a 401(k) plan is a plan qualified under Section 401(a) (or at least we mean it to be). Section 401(a) is the section that defines qualified plan trusts in general, including the various rules required for qualifications. Section 401(k) provides for an optional "cash or deferred" method of getting contributions from employees. So every 401(k) plan already is a 401(a) plan. The IRS says what can be done, but the operation of these plans is regulated by the Pension and Welfare Benefits Administration of the U.S. Department of Labor.
A 457(b) plan is a non-qualified, tax-deferred compensation plan offered by many non-profit institutions to their employees. This plan, like a 401(k) or 403(b) plan, allows you to save for retirement. Contributions are made from pre-tax wages, and the Internal Revenue Code sets the maximum contribution limits. The limit for 2003 is the lesser of $12,000 or 100% of an employee's salary. Catch-up provisions apply to those 50 or older; these people can contribute an extra $2,000. Because contributions are made before tax, naturally this means that taxes are due when withdrawals are made. However, these plans do not impose a penalty on early withdrawals. Funds in a 457(b) plan can be rolled into another 457(b) plan if you change employers. Alternately, a 457(b) account can be rolled into a different type of retirement-savings plan such as an IRA or a 401(k). As of 2002, an individual may participate in a 457(b) plan and a 403(b) plan at the same time.
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