When you start at a new job in government, military, or nonprofit work, you may be confused when you learn about the retirement plan offered. It’s often not a 401(k), as you might have received in private industries, but a 403(b), 401(a), 457, or TSP.
We’ve talked about 403(b) plans extensively already, but today we’ll discuss a few more types of plans. While they differ from 401(k)s in a few particulars, for the most part, you’ll recognize the rules and requirements.
401(a) Retirement Plan
These retirement plans are common at government agencies, educational institutions, and nonprofits. To qualify for a 401(a), you must be at least 21 years old and have worked for your employer for at least two years.
Your employer will contribute to the account, and you may also. Your own voluntary contributions are usually capped at 25% of your annual pay. The total combined contributions from you and your employer can’t exceed $58,000 per year.
Your employer has more control over how the money is invested than in a 401(k), and they usually choose very safe options. They can also decide whether to offer a tax-deferred 401(a) or a Roth 401(a), which determines whether you will need to pay taxes on the money before you put it in or when you take it out. When you leave your employer, you can roll over a 401(a) into another retirement fund, exactly as you can with a 401(k).
457(b) Retirement Plan
Employees of state and local governments often have access to this type of retirement plan. It works like a 401(k), with equal contribution limits. But as you approach retirement age, the allowed catch-up contributions are greater. If you’re within three years of retirement age, you can double your allowed contributions—$39,000 per year instead of $19,500.
When you stop working for your employer, you can access the money in your 457(b) without penalty, even if you haven’t reached retirement age. It’s the only type of plan with this advantage. If you don’t want to take a distribution, you can roll over the funds into another fund. If you work for a governmental entity, you can roll them into a 401(k) or IRA as well as another 457 plan. But if you work for a nonprofit, you can only roll them into another 457 plan.
457(f) Retirement Plan
This type of retirement plan is only for highly-compensated employees, such as the heads of nonprofits. Under a 457(f), you can contribute as much as you want, up to 100% of your salary. But this advantage comes at a tradeoff: you risk forfeiting all of it if you don’t stay with the company a certain number of years or meet performance requirements.
Some call a 457(f) “golden handcuffs,” because it ties you to your job, encouraging you to stay longer. But if you already hope to stay with the same organization for some time, it can allow you to save much more than you could with any other plan.
The money grows tax-free as long as it’s still held by the employer. Once you’ve met the requirements and the fund is yours again, the money in it is now taxable.
Thrift Savings Plan (TSP)
This is a type of retirement plan available to federal employees and members of the uniformed services. Like a 401(k), you can save for retirement with tax-deferred contributions, or, with a Roth TSP, with post-tax contributions. The agency that employs you can make matching contributions. You can roll a TSP into a 401(k) and vice versa.
Money in a TSP can be invested in one of six government funds, all of which are intended to match the performance of key benchmark indexes, like the S&P 500.
Understanding Your Options
When deciding whether and how much to invest in any retirement plan, you should seek out the best advice available. We can connect you with a financial advisor experienced in all types of plans, not just 401(k)s. A good advisor can demystify whatever retirement plan your employer offers.