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Author: keats Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76397  
Subject: 403b vs. 401k Date: 3/17/1998 11:53 PM
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Can someone explain the difference between these two, or point me to where I can find out.
Thanks
K
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2241 of 76397
Subject: Re: 403b vs. 401k Date: 3/18/1998 8:29 AM
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Keats,

<<Can someone explain the difference between these two, or point me to where I can find out. >>

401(k) Plan. Also known as a cash or deferred arrangement (CODA) plan, a 401(k) is a qualified defined contribution plan that takes its name from the section of the Internal Revenue Code which prescribes the rules under which it operates. It is a retirement plan in which the employer permits an employee to elect to receive part of his or her compensation in cash or to defer immediate receipt by contributing that part to his or her account in the 401(k) plan. Deferred contributions are made on a pre-tax basis, and those contributions and all earnings remain untaxed until withdrawn from the plan. The 401(k) may permit voluntary, after-tax contributions by employees. Earnings on after-tax contributions accumulate tax free until withdrawn. Many plans include a matching contribution from the employer according to a set formula (e.g., 50% of the employee's contribution up to a maximum of 6% of compensation). Employers may also make contributions to an employee's account independent of the employee's contribution, and these contributions may be tied to a firm's profits as part of a profit sharing plan. Participant pre-tax contributions are limited to the lesser of a maximum percentage of pay or $10,000 (as adjusted periodically for inflation) per year. The percentage limitation varies from employer to employer depending on a number of factors, but generally ranges from 12% to 20% of annual compensation.

A 401(k) plan generally offers participants an opportunity to direct their account contributions to a broad range of investment options from conservative risk to aggressive risk. These options may include institutional or mutual funds investing in the money market, bond market or stock market; annuities; guaranteed investment contracts (GICs); company stock; and self-directed brokerage accounts. A typical plan will offer a selection of a money market fund, a bond fund, and a stock fund.

In general, a 401(k) plan limits withdrawals of assets to five occasions: Termination from employment, disability, reaching the age of 59 1/2, retirement and death. Additionally, the plan may optionally include provisions for loans and/or hardship withdrawals.

State and local governments are prohibited from offering a 401(k) plan to their employees. This was once true of private, tax-exempt employers as well; however, as of January 1, 1997, the latter may now establish a 401(k) plan for their qualified employees.

403(b) Plan. A 403(b) plan is a defined contribution plan that takes its name from the section of the Internal Revenue Code that establishes the rules under which it operates. It is also known as and sometimes called a tax sheltered or a tax deferred annuity program. This plan is for educational, religious and charitable (i.e.,501(c)(3)) organization employees. It operates under similar maximum contribution rules and withdrawal privileges as a 401(k) plan. Like the 401(k), pre-tax contributions and all earnings remain tax free until withdrawn. There are two principal differences between a 401(k) and 403(b) plan. First, unlike the 401(k) plan, investment options in the 403(b) plan are limited to annuities and mutual funds only. Second, the 403(b) plan permits additional contributions under certain conditions that would otherwise exceed the normal annual limit of $10,000, as indexed. These additional contributions are to allow participants to "catch up" contributions for years in which they didn't participate, a feature not found in a 401(k) plan.

Regards….Pixy


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Author: PSUEngineerFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2246 of 76397
Subject: Re: 403b vs. 401k Date: 3/18/1998 1:12 PM
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<<State and local governments are prohibited from offering a 401(k) plan to their employees.>>

One small correction to what you wrote. This is not entirely true. State employees in North Carolina are not limited to 403(b) plans and can invest through a 401(k) plan that the State offers. I don't know if local or other states governments are limited.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2248 of 76397
Subject: Re: 403b vs. 401k Date: 3/18/1998 2:38 PM
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Greetings, PSUEngineerFool, and welcome.

You wrote:

"<<State and local governments are prohibited from offering a 401(k) plan to their employees.>>

One small correction to what you wrote. This is not entirely true. State employees in North Carolina are not limited to 403(b) plans and can invest through a 401(k) plan that the State offers. I don't know if local or other states governments are limited."

Section 401(k)(4)(b) of the Infernal (sic) Revenue Code specifies "STATE AND LOCAL GOVERNMENTS AND TAX EXEMPT ORGANIZATIONS NOT ELIGIBLE." Those are not my caps, but the code's.

I understand that public-sector employers (i.e., state and local governments) who had a 401k plan in effect prior to July 2, 1986, are grandfathered under the Tax Reform Act of 1986 and may continue with those plans. My assumption is North Carolina had a 401k plan in place prior to that date. If not, then perhaps they have a 457 plan that can look like - but is not - a 401k plan.

Regards…..Pixy




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Author: foolanders Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2257 of 76397
Subject: Re: 403b vs. 401k Date: 3/19/1998 9:13 AM
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As always, I learn something when I read your messages. Would you please expand on your explanation of "catch up" contributions to a 403b? My wife, a teacher, has taught for 7 consecutive years, but didn't start her 403b until 4 years ago. How can she "catch up?" on the missing 3 years?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2258 of 76397
Subject: Re: 403b vs. 401k Date: 3/19/1998 10:11 AM
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Foolanders,


<<As always, I learn something when I read your messages. Would you please expand on your explanation of "catch up" contributions to a 403b? My wife, a teacher, has taught for 7 consecutive years, but didn't start her 403b until 4 years ago. How can she "catch up?" on the missing 3 years?>>

These are far too complex to explain in a concise fashion. There are three methods that can be used, and they are mutually exclusive. Use one, and the other two can't be used. One allows the employee to use the full exclusion allowance up to $30K, but may only be used if the employee has ten years of service and is terminating employment. The second is limited to employees with 15 years of service, so it doesn't apply in your wife's case. The third affects everybody in the plan, requires an employer' approval, and has other sometimes unpleasant ramifications to participants other than the one trying to use the "catch up" provisions.

Your best bet is to have your wife see her benefits administrator to see how and when the earlier years when she didn't contribute can be made whole.

Regards…..Pixy



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Author: RogerD One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2259 of 76397
Subject: Re: 403b vs. 401k Date: 3/19/1998 10:12 AM
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"As always, I learn something when I read your messages. Would you please expand on your explanation of "catch up" contributions to a 403b? My wife, a teacher, has taught for 7 consecutive years, but didn't start her 403b until 4 years ago. How can she "catch up?" on the missing 3 years?"

She might want to call the retirement or benefits office for her school system to find out the maximum contribution she can make to her 403(b). The limit for contributions to the account depends on a number of factors that together permit her to catch up if she's been slow to contribute. I'm sure Pixy knows the rules and the formula they use for the maximum amount she can contribute, but I doubt that anyone on TMF can give you better information on how to actually do it than the people at her central office.

BTW, Pixy, what is that formula?

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2263 of 76397
Subject: Re: 403b vs. 401k Date: 3/19/1998 1:34 PM
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RogerD,

<<The limit for contributions to the account depends on a number of factors that together permit her to catch up if she's been slow to contribute. I'm sure Pixy knows the rules and the formula they use for the maximum amount she can contribute, but I doubt that anyone on TMF can give you better information on how to actually do it than the people at her central office.

BTW, Pixy, what is that formula?>>

There ain't no magic formula. As you point out, the limit depends on a number of factors not the least of which is the method of "catch up" elected. Overall, though, the combination of regular contributions and "catch up" contributions will be subject to a maximum of 25% of compensation or $30K, whichever is smaller.

Regards……Pixy




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Author: nonqual One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2337 of 76397
Subject: Re: 403b vs. 401k Date: 3/23/1998 2:54 PM
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BTW, Pixy, what is that formula?

It's covered in detail in Pub 571 available to view/download at http://www.irs.ustreas.gov/.

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Author: PSUEngineerFool Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 2356 of 76397
Subject: Re: 403b vs. 401k Date: 3/24/1998 2:56 PM
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Pixy,

You are correct. I meant to say 457 instead of 403(b) in my response.

For the record, North Carolina state employees can invest for retirement through either a 457 Deferred Compensation Plan or a 401k plan.

Sorry for the mistake.

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