Updated: Feb 14
Today we pick up where we left off yesterday talking about retirement accounts. Now what exactly is a 401k or 403b and what do those names mean? The people who named these retirement accounts weren’t too creative. All those names mean is that you find them in sections 401k and 403b of the internal revenue code. Creative eh?
These plans are used for employee retirement plans. A 401k is used for corporate America and 403b are used for nonprofits, schools and hospitals for the most part. There are exceptions. Now let’s talk about why these employee plans are key to retirement and when should you use them.
401k’s and 403b’s grow tax free and you pay taxes when you take out the money, like traditional IRA’s. Read yesterday’s article Initials and Numbers Part I. The beauty of these plans is that for the majority of them your employer gives you a percentage of your income as a company match. In other words, they give you free money! I get up to 8% of my salary put into my 403b. I get 5% put in just for being an employee and another 3% if I put in 3% of my own money. In other words, when I put in 8% they put in another 8%. So my money is already making 100% interest before I even put it in a mutual fund. Free money is always good. Take the free money!
I will pay taxes when I retire and I begin taking out the money. The money my employer gave me, the growth on that, will basically help pay the taxes. It is worth it!
In my philosophy I recommend putting 15% of your income towards retirement. If you have noticed I said I am only putting 8% into my 403b. Why is that? This is the key. You don’t want to put any money above and beyond your company match. If your company only matches 5% then you only put in 5%. If your company matches 8% like mine then only put in 8%. The remaining difference you put into a Roth IRA or regular IRA. You will always have more options for mutual funds in a personal retirement account.
I put the difference in a Roth IRA, because the remaining 7% of the 15% I have put away grows tax free and I take it out tax free.
If you make a great income and after putting money in your 401k or 403b and then in your Roth or IRA you still have part of the 15% dedicated to retirement to put away, then put go back to your 401k or 403b and put the money there. Tax free growth is always better than growth that is taxed.
Finally, if your employer has a Roth 401k or 403b, the above advise still applies. However, the added beauty is that your contribution grows tax free and you take them out tax free.
However, the employer contribution grows tax free but is taxed when you take it out. You can always choose the Roth 401k or 403b over a regular 401k or 403b. Talk to an investment advisor for specifics.
I hope I haven’t made your head spin but this is vital stuff.
If you have questions don’t hesitate to ask here. Take charge of your money!
Your biggest cheerleader on social media,
P.S. Day 322 please pray for the 7.2 million goal for 2020