There are very many different ways to invest available right at our fingertips. Many of us have 401(k), 403(b) or other employer-sponsored retirement investing options, but do we really understand them? Fret not, I’m here to break it down for you.
The difference between a 401(k) and a 403(b) is the type of employer sponsoring the accounts. 401(k) plans are generally offered by private, for-profit companies. 403(b) plans are available to government employers and nonprofit organizations. These accounts also vary in terms of set up, investment choices, fees and tax treatment.
There are other retirement options, such as 457, EP IRA, SIMPLE IRA, available, this post is focusing only on 401(k) and 403(b) plans.
401(k)
If your employer offers 401(k) plans and you are eligible to make contributions, please enroll. Some employers offer a match contribution. If your company offers a percentage match, contribute at least that percentage to get the match. That is free money!
Contributions to a traditional 401(k) are made before income taxes are imposed on your gross income. This lowers your taxable income and providing an immediate tax benefit. Withdrawal of funds in retirement, however, are subject to income tax.
Some companies also offer Roth 401(k). Just like Roth IRA, Roth 401(k) contributions are made after income taxes have been levied on your gross income and therefore, are not tax deductible. Distributions in retirement, however, are tax-free! Such a wonderful option.
403(b)
If you work for the federal government, public schools or tax-exempt organizations, a 403(b) is available to you. Some companies offer a match contribution, make sure you contribute the percentage required to get the match. Again, free money. Some companies offer both traditional and Roth options that work the same as described above.
**The 2021 contribution limit for both 401(k) and 403(b) is $19,500. This is for Roth and traditional combined.
I work for a federally qualified health clinic (FQHC), so the company offer 403(b) plans with both traditional and Roth options through The Standard investment company. I am currently only contributing towards my Roth 403(b). The company match is 3%, I contribute 12%. My company offers 22 different investment options that has a mixture of stocks and bonds mutual/index funds. Initially, standard was managing my portfolio and they picked funds that aligned with my investment risk.
During orientation, they gave me a questionnaire to fill out that determined my investment risk. Based on my answers, I fell under the “conservative portfolio”. Standard was able to allocate my funds in a diversified portfolio that had a combination of stocks and bonds. But now that I am wiser, I took control of my portfolio and changed to an “aggressive portfolio”. I went from 50% stocks/50% bonds to 90% stocks and 10% bonds.
If you have a company sponsored retirement account, find out:
- Which company is your employer using to invest your retirement? Some common companies are Fidelity, Vanguard, T. Rowe Price, The Standard, etc
- What investment options does your company provide? This information is available online.
- Do you know the fees associated with your current investment options?
- How is your current portfolio allocated? Are you conservative, moderate or aggressive?
- Is your account managed by a third party? Do you know the fees associated with your managed account? Do you feel comfortable managing it yourself?