To begin
with, many would perhaps, be perturbed by the names 401K, or 403B. The names reflect
the tax sections in the law books, and it makes it
all the more easier for you to understand the implications of the named tax
sections.
A 403B
plan is a retirement plan offered to nonprofits, or those
who work in public schools. Even persons who work in hospitals or religious
organizations are entitled to opt for 403B retirement plans.
401K
retirement plans are tailored for business people and corporate sectors that
belong to profitable organizations.
How does
a 401K or 403B works out?
Though, both
plans target different set of organizations, yet, the style of functioning is
probably very similar.
The employee working in an organization assigns
certain amount of funds to these retirement plans before tax deduction takes
place. These funds are allocated to various financial instruments, such as mutual funds, or
bonds according to the will of the employees.
The
remarkable feature of these apportioned funds to 401K, or 403B is the tax exemption
an employee receives for contributing funds.
Advantages
of 401K retirement benefit plan
• The
major advantage of opting for 401K plan is tax relief you get on the
contributing fund. Your taxable income lowers down after subtracting the funds
you plug into 401K plans.
Though,
you should remember the fact that once you withdraw funds, you will have to pay
taxes.
• The
most notable advantage of 401K plan is not just the tax savings on the
contributing funds, but a healthy tax savings on the interest you accrue over
the years. You don’t have to pay any taxes, whatsoever on the capital gains you
obtain through the plan.
• You
also have the right to steer your funds pushed into 401K to investment
portfolios of your choice. There are a number of choices that have been laid
out for you. You can choose to guide your funds to purchase stocks of the
company you work at.
If not, move
your funds to equity, or any other investment instruments according to your risk
appetite.
• How
many of you are aware of employers match for those opting for 401K retirement
plans. The employers add a significant amount to your contributions to 401K
plans, which is an additional benefit for the employee. The employer match is entirely
dependent on the tenure of the employee with the firm.
Benefits
and significance of 403B retirement plans
Though,
most of the advantages of 403B are quite similar to 401K, yet, you should know
few key benefits of 403B plans. As a contributing employee in 403B plan, you
are entitled to withdraw sums in phases.
The law
entitles you to withdraw funds once you attains the age of 59.5 years. The
withdrawal of funds is planned in a specific manner so that your funds reach
you by the expected end of your life.
Remember,
you are not permitted to withdraw funds before your age of 59.5 years. If you do
so, you will attract tax penalty of 10%, which is over and above the money you
need to pay as taxes for the withdrawn fund. But once, you cross the age of
59.5 years, you will only have to pay income tax on the withdrawn amount.
Though,
there are few out of sorts’ condition, where you may not have to pay taxes, or
a penalty.
You
should be aware of the fact that you need to begin withdrawing minimum funds as
soon as you attain a certain age, lest you may have to pay additional 50% as
taxes.
Though,
you don’t have much of a choice to pick 401K, or 403B, but you can always plan
your retirement, and lead a healthy lifestyle once you retire.
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