457(b) vs. 401(k): What are the key differences?


Administratively, Roth contributions must be made to a separate account, and records must be kept that distinguish the amount of contribution and the corresponding earnings that are to receive Roth treatment. This violation most commonly occurs when a person switches employers mid-year and the latest employer does not know to enforce the contribution limits on behalf of their employee.

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A b is a retirement plan offered by a state or local government entity, or a non-profit organization. These plans are much less common than the familiar k , but there are plenty of similarities.

And some big differences too. There are even differences between a b offered by a government entity and one offered by a non-profit organization. To distinguish between the two, the latter is called a tax-exempt or nongovernmental plan, while the former is known as a governmental plan.

Governmental plans may include state or municipal workers such as civil servants, police officers and firefighters. Eligibility for a b nongovernmental plan differs from that of a governmental plan. Not all employees are allowed to join a nongovernmental b — only highly-compensated executives, managers, and other key employees are eligible.

The plan document defines these eligibility requirements. Limiting participation to key executives is certainly a departure from ERISA rules which are designed to ensure that participation is widespread. In fact, the nongovernmental b is required to limit eligibility to key employees or become subject to ERISA regulation.

There is no discrimination testing and no Form filing required for either type of b retirement plan. Like our old friend the k , the b allows employees to defer a portion of their salary toward a retirement nest egg.

The contributions reduce taxable income, and can be invested in mutual funds where the returns are allowed to accumulate tax-free. When distributions are taken, they are taxed at ordinary income rates.

So far, very familiar. So employees can max out their k s and still contribute to the b. There are lots of differences between these two types of plans. Some of the most important differences are presented below: The k allows contributions from both the participant and the employer. In governmental plans where there is a traditional catch-up provision, employees are not allowed to catch-up both ways.

When a worker with a k plan changes jobs or retires it is common to move the assets from the former employer to a financial institution, all the while maintaining the tax-deferred status of the assets. The option is also available for employees enrolled in a governmental b.

But rollovers are not allowed in nongovernmental plans. That means when an employee changes jobs or retires, that employee must leave the assets in the plan, transfer them to another nongovernmental plan, or take distributions. Taking distributions results in a taxable event. This is the case even if an employee is leaving the plan due to a job change. However, income tax is owed on amounts withdrawn.

But employees in a nongovernmental plan with no rollover option have some important decisions to make regarding how to structure their taxable distributions. Different plans may offer different distribution options. The IRS allows k hardship withdrawals for immediate and heavy financial needs. Medical expenses, college tuition and even a home purchase could potentially quality.

The criteria for hardship withdrawals under either type of b are far more restrictive, and require that the funds be used for an unforeseen emergency. That means no withdrawals for tuition or new homes.

Of course borrowing against the account balance can be a much better option for employees in a financial jam. Honey finds the best promo code and applies it for you automatically - for free. Read More at joinhoney. You dismissed this ad. The feedback you provide will help us show you more relevant content in the future.

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