401(k), 403(b), 457(b), 415(m), TSP

WHAT ARE THE 401(k), 403(b), 457(b), 415(m) & TSP?

These 4XX() designations are sections of the IRS Code. The 401(k) is an employer-sponsored investment accounts that allows employees to contribute a portion of their wages pre-tax. This money grows tax-deferred, meaning you won’t pay taxes until you withdraw your funds. Depending on the 401(k) provider, you may also contribute after-tax money in a Roth 401(k), but distributions on earnings will be tax-deferred.

  • The 403(b) has similar properties and the same limit as a 401k, however they are meant for tax-sheltered public schools and other organizations.
  • The 457(b) is also similar to the 401k, except it is for local or state government and non-profit organizations.
  • The 415(m) plan is a Defined Contribution Plan. It is a special type of excess benefit plan available only to employees who are employed by government agencies. It is not a tax-qualified plan under Code section 401(a), but it does get special tax treatment. This account is used by employers to retain certain employees who may have special skills or knowledge that entitles them to more money than what other 401(a) plans allow.
  • The TSP (Thrift Savings Plan) is a government-sponsored plan offered only to federal employees and members of uniformed services. The TSP is actually the largest retirement plan in the world with over $800 billion in assets. The IRS offers a standard 4% match on contributions.

WHO CAN GET A 401(k), or…?

The only way to get a 401(k) is through your “private sector” employer, if they offer one. Smaller businesses typically do not offer 401(k) plans unless it is a SIMPLE 401(k) for small businesses. As mentioned in the section above, you must be a federal employee to qualify for the TSP, or you must be a local or state government employee to qualify for the 457(b).

Fidelity, Charles Schwab, Vanguard, and Empowerment are some of the most popular administrators for 401(k) accounts.

WHAT ARE THE CONTRIBUTION LIMITS?

The contribution limits for all of these accounts are identical.

  • The 2022 Contribution Limit is $20,500. You have until April 15th, 2023 (Tax Day) to maximize your contributions for 2022.
  • The 2023 Contribution Limit is $22,500.
  • If you are 50 or older, you can contribute an additional $6,500 (2022) or $7,500 (2023) as a “catch-up” contribution.
  • There is no age limit for contributions as long as you earn income with an employer who still sponsors your account.
  • Contribution Limits are not affected by rollovers. 
  • Employer or Government “Matching” contributions do NOT count towards standard contribution limits. Instead, the total contributions (Employee + Employer) are limited to $61,000 (2022) or $66,000 (2023). The “catch-up” total contribution limits are $67,500 (2022) and $73,500 (2023).
  • If you exceed the contribution limits, you will be charged 6% in taxes each year until you fix the overage.

WHEN CAN I WITHDRAW MY FUNDS?

  • You can withdraw your funds for any reason penalty-free at 591/2 years old. 
  • If you withdraw earnings before 591/2, will incur a 10% penalty fee on your withdrawals and you will have to pay both federal and state taxes.
  • At 72 years old, there will be minimum required distributions.
  • Depending on the administrator, you may be allowed to take a Hardship Withdrawal, which lets you withdraw money penalty-free for healthcare, insurance, $10,000 for your first home, and in rare cases, education.
  • Some administrators and employers offer 401(k) Loans where you borrow money against your retirement investments. The limit is $50,000 or half of your vested balance, whichever is lower. This loan is not tax-deductible and all interest payments go back to you. There is no credit check required. This comes with many risks. If you are let go from work, you will have to pay back the loan within 60 or 90 days.

WHAT ARE THE INCOME LIMITS?

There are no income limits to these accounts, however there are contribution limits.

HOW MUCH OF MY CONTRIBUTIONS ARE TAX-DEDUCTIBLE?

You can deduct all of your contributions up to the contribution limit for each year you contribute.

CAN YOU HAVE BENEFICIARIES?

You can set a primary and secondary beneficiary to your account. Because the money was invested pre-tax, beneficiaries will need to pay taxes on their withdrawals.

ADVANTAGES & DISADVANTAGES

AdvantagesDisadvantages
Easy Payroll DeductionsYou will owe taxes on gains
Employer Contribution MatchesYou may end up paying more in taxes when you withdraw your funds.
High Contribution LimitsMay Have High Administrative Fees
Tax-Deductible ContributionsLimited Investment Options
You can take it with you or rollover to another 4XX(k) when you switch employers. Contributions follow a set schedule that you cannot change depending on the company. Limited ability to change contributions. Usually 1 change allowed per month.

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