Saving for retirement is essential in today's world, and it is important to take advantage of every retirement savings vehicle you have available. Depending on the employer you work for, you might have access to either a 401a or a 403b plan. Understanding how these plans work, and how participating can benefit you, is vital if you are to enjoy a financially secure retirement.
A 401a money purchase plan is set up by your employer and designed to help you save for retirement. The design of these plans varies, and the exact rules governing the plan can be different from company to company. A 401a plan can include both employee and employer contributions, and in many cases the employee contributions are mandatory. The exact percentage of income dedicated to the 401a plan varies from company to company. When you are hired, your benefits office should provide you with information about the 401a plan and how you can start contributing.
Many public entities, including schools, hospitals and local government agencies, provide their employees with 403b plans. A 403b plan allows workers to put aside money for retirement and invest those funds in a variety of different places. For instance, a typical 403b plan might include several stock mutual funds, including both large cap and small cap funds, as well as a widely diversified index fund. The 403b might also include a number of bond funds, including both corporate and government bonds, as well as an international option and a stable value fund.
The money you contribute to a 401a or 403b plan can come out of your paycheck on either a pretax or post-tax basis. If the money comes out pretax, each dollar you contribute is deducted from your federal taxable wages, which in turn lowers your tax liability. If the money comes out post-tax, you still get a good retirement savings vehicle, but you do not get the immediate tax relief.
The contribution limits for a 403b plan are set by the IRS and reviewed each year. For 2011, you can contribute up to $16,500 to your company's 403b plan, plus an extra $5,500 if you are 50 years of age or older. These limits apply to employee contributions only, and do not impact the employer's ability to put extra money in the plan on your behalf.