Site icon Qor Tuba

What Is The Difference Between A 401(k) Plan And A 457 Plan?

What Is The Difference Between A 401(k) Plan And A 457 Plan?

There are two types of employee retirement savings plans tax-advantaged by the Internal Revenue Service, the 401(k) plan and the 457 plan. IRAs are tax-advantaged plans in which participants can deposit pretax money until it is withdrawn before it is taxed.

In addition to Social Security and pensions, these accounts were designed to assist with the famed three-legged stool of retirement: workplace pensions, personal retirement savings, and Social Security. Retirement savings and Social Security have increasingly become the primary retirement plans for most people, as workplace pension plans become obsolete.

There is a noticeable similarity between 401(k) and 457 retirement plans, with the main difference being who can participate in them. Meetbeagle.com can provide you with more information on these plans.

The 401(k) plan

Most defined-contribution retirement plans are offered by private for-profit and nonprofit employers, and 401(k) plans are the most common of these plans. A 401(k) plan falls under the Employee Retirement Income Security Act (ERISA) of 1974 and is therefore considered a qualified retirement plan.

Contributions can be made to employee 401(k) plans by employers that sponsor 401(k) plans. Tax-deferred earnings in a 401(k) plan accumulate over time. Additionally, 401(k) plans offer a range of investment options selected by the plan sponsor. Participants choose which investment options they want to make.

Contributions to the plans are capped each year at $19,500 (and $20,500 in 2022). Both plans provide a catch-up provision for employees over age 50, which allows them to contribute up to $6,500 more.

If a withdrawal is made before age 5912, a 10% early withdrawal penalty will apply. Plan participants, however, can withdraw funds from their 401(k) accounts without penalty under certain circumstances, depending on their 401(k) plan.

457 Plans

State and local public employers and some nonprofit employers offer tax-advantaged retirement plans sanctioned by the Internal Revenue Service, called 457(b) plans. In terms of defined contribution retirement plans, they are among the least prevalent.

Employees fund their defined-contribution plans by setting aside a portion of their salaries through payroll deductions, so both 401(k) and 457 plans are defined-contribution plans. Any subsequent growth in the accounts is not taxed after these funds enter the retirement account, unless the participant opens a Roth account.

Factors to consider

401(k)s and 457 plans are both nonqualified retirement plans, so both can be contributed simultaneously. The government offers both plans. During such instances, each joint participant has the option of contributing the maximum amount.

Get $100k Virtual Cash to Compete Risk Free

Use our FREE Stock Simulator to test your trading skills. Trade your way to the top of the list against thousands of Investopedia traders! Before you risk your own money, try out trades in a virtual environment. You should practice trading strategies before entering the real market, so you have the necessary experience when you enter it.

 

Exit mobile version