As a first-responder, you may have access to a few different types of retirement plans. For example, 403(b) plans are typically offered to those who work for public educational institutions, such as public schools, certain types of nonprofits, and church or church-related organizations.
457(b) plans are most often offered for those employed by state or local government agencies and other non-profit organizations. In some cases, your employer may offer and allow you to contribute to both types of accounts.
Much like a traditional 401(k) plan, 403(b) and 457(b) plans allow you to put aside tax-deferred money into different types of investments for retirement. We’ll explore both plan types below to help you decide the best way to put aside money for retirement.
403(b) plans are offered by public schools and certain non-profit, tax-exempt organizations. 403(b) plans may also be referred to as a TSA plan (tax-sheltered annuity) or a TDA plan (tax-deferred annuity).1
When these plans were created, investing in annuities was the only option. However, many 403(b) plans have now expanded to include mutual fund investment options as well.1,2
The annual contribution limit for 403(b) plans for 2021 is $19,500, with an option to invest an additional $6,500 in catch-up contributions for employees who will be age 50 years or older by the end of the calendar year.2 While a 403(b) is funded primarily by the employee, employers may also choose to match contributions.2
Contributing to a 403(b) may incur higher administrative costs than a 401(k). The employee typically pays for investment fees, but employers can opt to pay some or all of the administrative fees. Review your paperwork carefully to determine what fees, if any, you may be responsible for.
This plan is subject to the “universal availability rule,” which means that if your employer offers this retirement plan to one employee, it must be offered to all employees. However, there are some exceptions to this rule.2
If you meet any of the following criteria, you may be excluded from participating in the plan:2
Employees who will contribute $200 or less annually
Employees who participate in a 401(k), 457(b), or in another 403(b) plan of the employer
Employees who typically work less than 20 hours per week
457(b) plans are offered by state and local governments, as well as select 503(c) non-profit companies. The investment options for 457(b) plans also include annuities and mutual fund investment options.3
Much like the 403(b) plan, the annual contribution limit for 457(b) plans for 2022 is $20,500.3 If a plan participant is within three years of normal retirement age, they may also participate in additional catch-up contributions.3 Normal retirement age is defined as being between ages 65-67 years, but it can be as low as 62 years old with IRS approval. However, we know for first responders the normal retirement age is typically in their early 50s. Confirm with your employer what they consider normal retirement age to determine if you’re eligible for additional contributions.
Your additional investment amounts can either be twice the annual limit, for a total annual contribution limit of $39,000, or the basic annual limit plus the amount of the basic limit not used in prior years.3 The latter option is only available if the participant is not using the 50 and over catch-up contributions.3
One of the most significant benefits of a 457 plan is the tax options for contributions. The standard option is similar to a 403b or 401k where contributions are deposited pre-tax (benefit now) and are taxed upon withdrawal. Some plans may also offer the Roth option. Roth contributions are taxed now and will grow tax-free and be withdrawn tax-free (benefit later). Another key benefit of a 457(b) is the ability to avoid the typical early withdrawal penalty before 59 1/2.
Your employer may offer one or both of these options. It’s important to talk with your financial advisor or tax advisor to determine what option is best for you.
Schedule time with our team of experts to discuss your options. You can also explore our five tips for planning a successful retirement as a first responder.
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