The Retirement Matrix
Retirement planning can involve enough letters and numbers to see little b's and k's jumping sheep in your sleep. Here, we try and break down some of the different options for retirement planning.
457 (b)/(f) |
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| Cash In The Account | Pretax elective contributions in cash from account holder, dividends, and interest within account incurred with no tax liability |
Post-tax elective contributions from account holder. |
Cash deposited by account holder, after income taxes, along with dividends, and interest within account incurred with no tax liability |
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| Who Offers It? | State and local governments as well as select non-profits (501(c)) |
Public education intuitions and select non-profits (501(c)3s) |
All non-government employers |
All non-government employers |
Individual purchase from banks and brokerages |
Individual purchase from banks and brokerages |
| Who's Eligible? | Employees, contractors and consultants, and in some cases, highly compensated employees. |
All employees |
All employees |
All employees |
Anybody - individual contributes outside of employment |
Anybody - individual contributues outside of employment |
| How Is It Managed | These funds are managed through the administrator chosen by your employer. The employee elects to register beginning their contributions, and is responsible for managing the investment selections. | Individuals open an account through a brokerage or financial advisor. | ||||
| Investment Selections | Employees chose among the investment opportunities proposed by the plan's administrator. | Open to many selections per brokerage accounting, including but not limited to: ETFs, mutual funds, individual securities and fixed income investments. | ||||
| Contributions | Up to $15,500 per year under age 50 and $20,500 over 50. Employee and employer combined contributions must be lesser of 100% of employee's salary or $46k |
$5,000 per year if under 60; $6,000/yr for age 50 or above in 2008 * |
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* IRA contributions are total across any IRAs you may own. Your total investment amount to all these arrangements may not exceed the limit for your age group. Just think rollover in this case. |
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| Catch Up Contributions | Yes, limited to basic annual limit, or basic annual limit plus uncontributed amount from year before |
Limited based on years of enrollments, starting at $3000 |
No if under 50 |
Yes |
Yes |
Yes |
| Matching | Yes - These plans are designed to have matching contributions from employers, but the formula for matching is at the employer's discrertion. |
Yes, but to a pre-tax account (i.e. any of the 400s). |
No |
No |
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| Distributions/ Mandatory Distributions |
Termination of employment, or age 70 ½ .
Forced distribution* at age 70 ½, unless the holder is still employed. |
Death, termination of employment, disability or age 59 ½. Forced distribution at age 70 ½, unless the holder is still employed. |
Distributions can begin at age 59 1/2 as long as the account has been open for at least 5 years; there are exceptions though. Forced distribution at age 70 ½, unless the holder is still employed. |
Distributions can begin at age 59 1/2 as long as the account has been open for at least 5 years; there are exceptions. There is no forced distribution. |
Death, termination of employment, disability or age 59 ½.
Forced distribution at age 70 ½, unless the holder is still employed. |
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| A note of on forced distrubtions | Forced distrubution is not a lump sum, but is an increasing percentage of the plan's balance the prior year based on acruarial (usage of the principles of compound interest and laws of insurance probabilities) life expectancy. This is called Minimum Required Distrubutions (MRD) by the IRS, and are based on Uniform Lifetime Table set by the IRS. So an 80 year old woman, with a savings valued at $300,000 the previous year has a divisor of 18.7 and an MRD of $16,042.78. Set up to ensure coverage of daily living expenses, MRDs cannot be rolled over. | |||||
| Rollover | Only 457(b) government funds. All others - no |
Yes |
Yes – to another employers 401K or a traditional IRA |
Yes - Upon termination of employment, it can be converted or rolled into to a Roth IRA |
Yes - to another Roth IRA. |
Yes - to a Roth IRA. Taxes are assessed during the year of conversion |
| Tax Implications | Money and its earnings are tax deferred until distributions, at which point it is taxed as normal income.
The benefit here is that by retirement, your income level will have shrunk, and your distributions will not be taxed as high as they would be at the height of your career. |
Income is deposited after taxes, and will not be taxed upon distribution |
There is no deductible on contributions to a Roth IRA, but income is not taxed on distribution |
Contributions are deductible in the year you make them, up to April of the following calendar year. Cash and earning are taxed deferred until distrubition. |
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| Pros | Tax deferred compound growth. No taxes until distribution. Employer matching contributions. Mandates saving discipline |
Tax deferred compound growth. No taxes until distribution. |
Tax deferred compound growth. No taxes until distribution. |
Tax deferred compound growth. |
Tax-free compound growth. No forced distribution. At any point after five years, the whole contribution may be withdrawn for certain reasons like buying a first home. |
Tax deferred compound growth. |
| Cons | Fees and costs of the administrator may be higher than the norm. Invest choices are limited to those decided on by employer and administrator. No taxes upfront, but you do pay taxes on withdrawl. Ideally, you're going to retire at a higher tax bracket than you are now. |
Beyond the cons of the other 400s, the Roth 400s are post-tax dollars. Because of their newness not very many people offer them. Employer matchig contributions got to a different fund. |
Contributions are not deductible.(But think about your taxes now, versus the rate when you retire, when would you rather pay taxes?) Earnings on the account are taxable and subject to an early withdrawal penalty only when a withdrawal is not a "qualified" distribution. |
Contributions are taxed on distribution. Traditional IRAs do not have the same withdrawl perks as a Roth IRA, you don't see this cash and its earning again until you're 59 1/2 - if you do, you may pay a 10 percent penatly. |
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