How to Plan for Retirement A 401K or 403B

Thursday, July 15, 2010

How to Plan for Retirement A 401K or 403B

To begin with, many would perhaps, be perturbed by the names 401K, or 403B. The names reflect the tax sections in the law books, and it makes it all the more easier for you to understand the implications of the named tax sections.

A 403B plan is a retirement plan offered to nonprofits, or those who work in public schools. Even persons who work in hospitals or religious organizations are entitled to opt for 403B retirement plans.

401K retirement plans are tailored for business people and corporate sectors that belong to profitable organizations.

How does a 401K or 403B works out?

Though, both plans target different set of organizations, yet, the style of functioning is probably very similar.

The employee working in an organization assigns certain amount of funds to these retirement plans before tax deduction takes place. These funds are allocated to various financial instruments, such as mutual funds, or bonds according to the will of the employees.

The remarkable feature of these apportioned funds to 401K, or 403B is the tax exemption an employee receives for contributing funds.

Advantages of 401K retirement benefit plan

• The major advantage of opting for 401K plan is tax relief you get on the contributing fund. Your taxable income lowers down after subtracting the funds you plug into 401K plans.

Though, you should remember the fact that once you withdraw funds, you will have to pay taxes.

• The most notable advantage of 401K plan is not just the tax savings on the contributing funds, but a healthy tax savings on the interest you accrue over the years. You don’t have to pay any taxes, whatsoever on the capital gains you obtain through the plan.

• You also have the right to steer your funds pushed into 401K to investment portfolios of your choice. There are a number of choices that have been laid out for you. You can choose to guide your funds to purchase stocks of the company you work at.

If not, move your funds to equity, or any other investment instruments according to your risk appetite.

• How many of you are aware of employers match for those opting for 401K retirement plans. The employers add a significant amount to your contributions to 401K plans, which is an additional benefit for the employee. The employer match is entirely dependent on the tenure of the employee with the firm.

Benefits and significance of 403B retirement plans

Though, most of the advantages of 403B are quite similar to 401K, yet, you should know few key benefits of 403B plans. As a contributing employee in 403B plan, you are entitled to withdraw sums in phases.

The law entitles you to withdraw funds once you attains the age of 59.5 years. The withdrawal of funds is planned in a specific manner so that your funds reach you by the expected end of your life.

Remember, you are not permitted to withdraw funds before your age of 59.5 years. If you do so, you will attract tax penalty of 10%, which is over and above the money you need to pay as taxes for the withdrawn fund. But once, you cross the age of 59.5 years, you will only have to pay income tax on the withdrawn amount.

Though, there are few out of sorts’ condition, where you may not have to pay taxes, or a penalty.

You should be aware of the fact that you need to begin withdrawing minimum funds as soon as you attain a certain age, lest you may have to pay additional 50% as taxes.

Though, you don’t have much of a choice to pick 401K, or 403B, but you can always plan your retirement, and lead a healthy lifestyle once you retire.

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