401(k) You participate in a 401(k) retirement savings plan by deferring part of your salary into an account set up in your name. Any earnings in the account are federal income tax deferred. If you change jobs, 401(k) plans are portable, which means that you can move your accumulated assets to a new employer's plan, if the plan allows transfers, or to a rollover IRA. With a traditional 401(k), you defer pretax income, which reduces the income tax you owe in the year you made the contribution. You pay tax on all withdrawals at your regular rate. With the newer Roth 401(k), which is offered in some but not all plans, you contribute after-tax income. Earnings accumulate tax deferred, but your withdrawals are completely tax free if your account has been open at least five years and you're at least 59½. In either type of 401(k), you can defer up to the federal cap, plus an annual catch-up contribution if you're 50 or older. However, you may be able to contribute less than the cap if you're a highly compensated employee or if your employer limits contributions to a percentage of your salary. Your employer may match some or all of your contributions, based on the terms of the plan you participate in, but matching isn't required. With a 401(k), you are responsible for making your own investment decisions by choosing from among investment alternatives offered by the plan. Those alternatives typically include separate accounts, mutual funds, annuities, fixed-income investments, and sometimes company stock. You may owe an additional 10% federal tax penalty if you withdraw from a 401(k) before you reach 59½. You must begin to take required minimum distributions by April 1 of the year following the year you turn 70½ unless you're still working. But if you prefer you can roll over your traditional 401(k) assets into a traditional IRA and your Roth 401(k) assets into a Roth IRA.
403(b) A 403(b) plan, sometimes known as a tax-sheltered annuity (TSA) or a tax-deferred annuity (TDA), is an employer-sponsored retirement savings plan for employees of not-for-profit organizations, such as colleges, hospitals, foundations, and cultural institutions. Some employers offer 403(b) plans as a supplement to - rather than a replacement for - defined benefit pensions. Others offer them as the organization's only retirement plan. Your contributions to a traditional 403(b) are tax deductible, and any earnings are tax deferred. Contributions to a Roth 403(b) are made with after-tax dollars, but the withdrawals are tax free if the account has been open at least five years and you're 59½ or older. There's an annual contribution limit, but you can add an additional catch-up contribution if you're 50 or older. With a 403(b), you are responsible for making your own investment decisions by choosing from among investment alternatives offered by the plan. You can roll over your assets to another employer's plan or an IRA when you leave your job, or to an IRA when you retire. You may withdraw without penalty once you reach 59 1/2, or sometimes earlier if you retire. You must begin required withdrawals by April 1 of the year following the year you turn 72 unless you are still working. In that case, you can postpone withdrawals until April 1 following the year you retire.
457 These tax-deferred retirement savings plans are available to state and municipal employees. Like 401(k) and 403(b) plans, the money you contribute and any earnings that accumulate in your name are not taxed until you withdraw the money, usually after retirement. The contribution levels are also the same, though 457s may allow larger catch-up contributions. You also have the right to roll your plan assets over into another employer's plan, including a 401(k) or 403(b), or an individual retirement account (IRA) when you leave your job.
529 college savings plan Each 529 college savings plan is sponsored by a particular state, and while each plan is a little different, they share many basic elements. When you invest in a 529 savings plan, any earnings in your account accumulate tax free, and you can make federally tax-free withdrawals to pay for qualified educational expenses, such as college tuition, room and board, and books at any accredited college, university, vocational, or technical program in the United States and a number of institutions overseas. Some states also exempt earnings from state income tax, and may offer additional advantages to state residents, such as tax deductions for contributions. You must name a beneficiary when you open a 529 savings plan account, but you may change beneficiaries if you wish, as long as the new beneficiary is a member of the same extended family as the original beneficiary. In most cases, you may choose any state's plan, even if neither you nor your beneficiary live in that state. There are no income limits restricting who can contribute to a plan, and the lifetime contributions are more than $300,000 in some states. You can make a one-time contribution of $75,000 without incurring potential gift tax, provided you don't make another contribution for five years. Or, you may prefer to add smaller amounts, up to the annual gift exclusion, which is $15,000 per recipient in 2020.
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