When it comes to saving for retirement, there are a few options available to you. One of the most popular choices is the 401a plan. But what about 457 plans? Which one is better for you?
In this personal finance guide, we will compare 401a Vs 457 and look into the advantages and disadvantages of each.
By the end of this article, you will be able to make an informed decision about which plan is best for your needs!
401a Vs 457 Table of Contents
What is a 401a?
A 401a is a retirement savings plan that is sponsored by an employer. It is similar to a 401k, but there are some key differences.
Contributions to a 401a are made pre-tax, which means that they lower your taxable income. This can be a big advantage if you are in a high tax bracket.
What is a 457?
A 457 is a retirement savings plan that is sponsored by an employer. It allows employees to save for retirement on a tax-deferred basis.
The money in the account can be invested in a variety of ways, including stocks, bonds, and mutual funds. Employees can contribute to their 457 on a pre-tax or post-tax basis.
What is The Difference Between a 401a and a 457?
The most significant difference between a 401a and a 457 is the contribution limit. A 401a allows you to contribute up to $18,000 per year, while a 457 only allows you to contribute $12,500 per year. This may not seem like a big difference, but over the course of your career, it can add up to a significant amount of money.
Another difference between the two is that a 401a is an employer-sponsored retirement plan, while a 457 is not. This means that if you leave your job, you will no longer be able to contribute to your 401a. However, you can still contribute to your 457 even if you leave your job.
Finally, the way that withdrawals are taxed is different for a 401a and a 457. With a 401a, you will pay taxes on your withdrawals when you retire. With a 457, you can choose to have your withdrawals taxed either now or when you retire.
What Are The Different Types of 401a?
There are three different types of 401a:
The traditional 401a is the most common type and it works like a regular 401k. You contribute pre-tax income to the account and your employer may match a portion of your contributions. The money in the account grows tax-deferred and you pay taxes on withdrawals in retirement.
The Roth 401a is similar to the traditional 401a, but you contribute after-tax income to the account. The money in the account grows tax-free and you don't have to pay taxes on withdrawals in retirement.
The SIMPLE 401a is a simplified version of the traditional 401a. It has lower contribution limits and doesn't allow employer matching contributions. However, it does have lower administrative costs and is easier to set up.
What Are The Different Types of 457?
There are two types of 457 plans:
The traditional 457 is funded with pre-tax dollars, meaning that your contributions are not subject to federal income tax.
The Roth 457 is funded with after-tax dollars, meaning that your contributions are subject to federal income tax.
What Are The Advantages of a 401a?
There are a few key advantages that a 401a has over a 457. First, the contribution limit for a 401a is much higher than that of a 457. This means that you can save more for retirement with a 401a. Additionally, employer contributions to a 401a are often tax-deductible, while they may not be with a 457.
What Are The Advantages of a 457?
The 457 has a number of advantages over the 401a. Perhaps most importantly, the 457 allows you to save more money on a tax-deferred basis. This can be a huge advantage if you're in a high tax bracket and are looking to shelter as much income as possible from taxes.
Another advantage of the 457 is that it doesn't have the same early withdrawal penalties as the 401a. This means that if you need to access your funds before retirement, you won't be hit with a hefty tax bill.
Finally, the 457 also offers more flexibility in how you can take distributions from your account. For example, you can choose to take distributions in a lump sum or in installments over a period of time. This can be a great advantage if you're looking to minimize your tax liability in retirement.
What Are The Disadvantages of 401a?
The main disadvantage of 401a is that it is not available to everyone. Only those who work for certain employers can get access to this retirement savings plan. This means that if you change jobs, you may not be able to keep your 401a plan.
Another downside of 401a is that there are contribution limits in place. For 2022, the contribution limit is $19,500. This may not be enough for some people, especially if they have a long way to go before retirement.
Finally, 401a plans are not portable. This means that if you leave your job, you will likely have to cash out your account and pay taxes on the money.
What Are The Disadvantages of 457?
There are a few disadvantages of the 457 that you should be aware of before making your decision. One is that there is a limit on how much you can contribute each year, which may not be enough for some people.
Additionally, the money in your account is subject to taxes when you withdraw it, so you will not get the full value of your investment back. Finally, if you leave your job before you retire, you will likely have to pay a penalty for early withdrawal.
So, Which One Should You Use?
The answer to this question depends on a few factors. If you are already contributing the maximum amount to your 401k, then the 457 might be a better option. This is because the contribution limit for a 457 is higher than that of a 401k.
Another factor to consider is whether or not you are eligible for an employer match. If you are, then you will want to contribute enough to your 401k to get the full match.
Lastly, you will want to consider your tax situation. The 457 is a pretax account, which means that your contributions are made with pre-tax dollars. This can be beneficial if you are in a high tax bracket.
What Are Some Alternatives to Using a 401a or a 457?
There are a few alternatives to using a 401a or 457. One option is to use a Roth IRA. With a Roth IRA, you can contribute after-tax dollars and all future withdrawals are tax-free.
Another option is to invest in a traditional brokerage account. This allows you to choose your own investments and have more control over your portfolio. The downside is that you will pay taxes on any gains when you sell your investments.
What Are Some Tips For Using a 401a?
If you are using a 401a, there are a few things to keep in mind. First, you will want to make sure that you contribute enough to get the full employer match. This is free money that can help you grow your retirement savings.
Second, you will want to be mindful of the contribution limit. You don't want to over-contribute and be subject to taxes and penalties.
Finally, you will want to consider how your 401a will work with other retirement accounts. For example, you may want to rollover your 401k into an IRA when you leave your job. This can help you keep more control over your investments and minimize taxes in retirement.
What Are Some Tips For Using a 457?
There are a few things to keep in mind when using a 457.
First, remember that this is an employer-sponsored retirement plan. This means that your employer has control over the investment options and how much you can contribute.
Second, 457 contributions are made with after-tax dollars. This means that you will not get a tax deduction for your contributions. However, your withdrawals will be tax-free.
Finally, 457 plans have early withdrawal penalties. This means that if you withdraw money from your account before you reach retirement age, you will pay a penalty.