The Most Popular & Most Misunderstood

First off what is a 401k??

What about a 403b?

I have a 457b... What's that ?

A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.

• Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).

• Employers can contribute to employees’ accounts.

• Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).

A 403(b) plan (also called a tax-sheltered annuity or TSA plan) is a retirement plan offered by public schools and certain 501(c)(3) tax-exempt organizations. Employees save for retirement by contributing to individual accounts. Employers can also contribute to employees' accounts.

Just as with a 401(k) plan, a 403(b) plan lets employees defer some of their salary into individual accounts. The deferred salary is generally not subject to federal or state income tax until it's distributed. However, a 403(b) plan may also offer designated Roth accounts. Salary contributed to a Roth account is taxed currently but is tax-free (including earnings) when distributed.

Plans of deferred compensation described in IRC section 457 are available for certain state and local governments and non-governmental entities tax exempt under IRC Section 501. They can be either eligible plans under IRC 457(b) or ineligible plans under IRC 457(f). Plans eligible under 457(b) allow employees of sponsoring organizations to defer income taxation on retirement savings into future years. Ineligible plans may trigger different tax treatment under IRC 457(f).

Who can establish a 457(b) plan?

The organization must be a state or local government or a tax-exempt organization under IRC 501(c)

So simply put a traditional 401k or 403b and even a 457b are just retirement accounts that are provided to you by your employer so that you can contribute PRE-tax dollars from your paycheck to let your money grow tax-deferred

Okay hold up.. What does Tax-Deferred mean??

A tax deferred account simply means you put money that hasn't been taxed yet into the account. You pay taxes on that money only when you withdraw it. At that point it will be taxed as ordinary income.. Most the time

Most the time?! What's that mean?

Any early withdrawal from one of these accounts..

(Anything before the age of 59 1/2)

Will face a 10% penalty on top of being taxed as ordinary income.

These retirement accounts have a lot of rules and regulations we will outline in the next section. They are quite often matched with a contribution from the employer which is beneficial. They come with a handful of investment strategies which can be hard to navigate on your own and can leave you a little "out of the loop" when it comes to understanding exactly how your money is accumulating inside of one of these accounts.

Something else to take into account is the management fees you can be charged with these accounts. Usually split into two categories.. Administrative and Investment fees. Some plans will even charge service fees for things like taking withdrawals or loans out of the account.

Exceptions: There are specific exceptions to the penalty, such as for certain medical expenses, higher education costs, a first-time home purchase, or if you are a qualified military reservist called to active duty. Recent legislation (Secure 2.0 Act) also created new exceptions for financial emergencies, victims of domestic abuse, and those with terminal illnesses

It is also worth adding with a 457b plan if you are separated from the employer before the age of 59 1/2 you won't face the 10% penalty

Contributing to an account like this can be great to keep you from being placed in a higher tax bracket.. Although there are pros and cons to all accounts of course

Contribution Limits

"While elective deferral limits to all three plan types are $23,500 in 2025, there are some other important contribution limit distinctions. In 457(b) plans, the limit on combined elective deferral and employer contributions is the same as the elective deferral limit ($23,500). In both 401(k) and 403(b) plans, the combined elective deferral, and employer contribution limit is significantly larger—up to $70,000 in 2025, depending on compensation.

While the combined 457(b) limits are lower, the 457(b) elective deferral limit is not offset by 401(k) or 403(b) deferrals. Thus, the maximum deferral limit of $23,500 may be contributed to a 457(b) plan, regardless of whether any deferrals or employer contributions have been made to a 403(b) or 401(k) plan. For organizations offering a combination of these plans, this presents an opportunity for a participant to contribute to both.

Special elections allow additional elective deferrals based on certain factors. The age 50 catch-up election, which expands the $23,500 limit in 2023 to $31,000, is available in 403(b), 401(k), and public 457(b) plans but is unavailable for 457(b) plans of private tax-exempt organizations. The same is true for the new Age 60-63 catch-up election under SECURE 2.0, which expands the $23,500 limit to $34,750.

Unique to 403(b) plans is the 15-year catch-up election, which allows a plan to permit employees who have 15 or more years of service and who satisfy additional requirements to defer up to an additional $3,000 beyond the 402(g) limit of $23,500 ($31,000 if age 50 or older, $34,750 if age 60-63) in 2025. However, this election can be complicated to calculate. The 457(b) election permits those in their final three years of employment prior to retirement to defer up to an additional $23,500 in 2025."

- Michael A Webb "Navigating the Number Jumble"

https://www.captrust.com/resources/navigating-the-number-jumble-403b-401k-457b-comparison/

Let's get to the point already right?

What can be the pros and cons of these Retirement Accounts ?

How much should I contribute??

Do I lose money if the market tanks???

• Tax-Deferred Growth
Your money grows tax-deferred, meaning you don’t pay taxes on contributions or earnings until retirement.

• Reduce Today’s Taxable Income
Contributions lower your taxable income in the year you make them, which may reduce your tax bill.

• Higher Contribution Limits Than IRAs
You can save significantly more each year versus personal retirement accounts like IRAs.

• Extra Contributions for Ages 50+
Once you’re 50 or older, you can contribute additional “catch-up” amounts.

• Easy & Automatic Savings
Contributions come straight out of your paycheck, helping you build savings consistently.

• Potential Employer Contributions
Many employers match or contribute to your plan, helping your money grow faster.

• Rollovers When Changing Jobs
You can usually move funds to another qualified plan or IRA without taxes if done correctly.

Pros

Cons

• Withdrawals Are Taxable
Money taken out in retirement is taxed as ordinary income.

• Unknown Future Tax Bill (Added as requested)
Because taxes are deferred, you won’t know the tax rate you’ll pay when withdrawing the money in retirement. If tax rates rise in the future—or if you’re in a higher tax bracket later—you may end up paying significantly more in taxes than if you had paid tax upfront when the money was earned.

• Penalties for Early Withdrawals
Taking money out before age 59½ may result in income tax plus a 10% penalty (unless an exception applies).

• Annual Contribution Limits
The IRS caps how much you can contribute each year.

• Required Withdrawals Later in Life
At a certain age (currently 73), you must begin taking Required Minimum Distributions (RMDs), creating taxable income whether you need the money or not.

• Limited Access Before Retirement
Withdrawals while still working are restricted to specific situations such as hardship, plan loans (if allowed), separation from service, or certain qualifying events.

• Must Follow Rules to Avoid Taxes on Rollovers
If you mishandle a rollover, the amount may be taxed and penalized.

Interested in an in depth deep dive on the ins and outs of all these accounts we just talked about ? We'll send you a free PDF that goes into great detail

Watch this video to summarize what we went over here..

Want to avoid paying taxes all-together on your retirement income??