Discerning the 401(k), 403(b), and 457(b)

It can feel overwhelming trying to discern the difference between a 401(k), 403(b), 457(b), traditional IRA, Roth IRA, and an HSA. And even if you did understand the difference, how do you know which one to contribute to and how much? More on this later.

Simply put, retirement vehicles can be broken down into 2 categories: pre-tax and after-tax. In this post, we will be discussing pre-tax retirement vehicles such as the 401(k), 403(b), and 457(b).

The 401(k), 403(b), and 457(b) are pre-tax retirement investment vehicles.

Pre-tax vehicles (e.g., 401(k), 403(b), and 457(b)) are traditional retirement accounts where contributions are not taxed until AFTER you retire. As previously mentioned, your contributions are invested in a fund that accumulates interest as well as dividends and will not be subject to federal/state income tax until retirement age. Currently, the IRS limits the annual contribution to each of these accounts to $18,000 (unless your age > 50, then that limit is increased to $24,000). Remember, the other advantage to contributing your retirement is that it decreases your taxable income. Back to the previous example, if you make $150,000 as a new grad CRNA and you contribute $18,000 to your 401(k), the federal government will tax you on $132,000 rather than $150,000; thus, lowering your tax liability.

The IRS limits the annual contribution to each retirement account to $18,000 ($24,000 if you’re older than 50)

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So, what exactly is the difference between these vehicles? Why exactly are they given these names? The unusual names of most of these plans come from the parts of the Internal Revenue Code that relate to them. In a nutshell, the 401(k) is a retirement savings account often offered to private sector employees. It’s the retirement account that many of us are familiar. So, if you’re working for a non-profit, private hospital or a large anesthesia group, most likely you’ll be offered a 401(k) plan. 403(b) and 457(b) plans are usually offered to public sector employees. Regardless of whether you work in the private or public sector, it’s important to take advantage of these tax-shelter plans as they serve two purposes:

  1. You’re saving for your retirement.
  2. You’re saving on taxes (in the present moment, that is. You’ll still be taxed but only on retirement).

If you’re a public employee, your next question is probably which retirement vehicle should you store your money, the 403(b) or 457(b)? The answer to this question is it depends on what your priorities are and when you think you want to start withdrawing from your retirement funds. Withdrawing from the 403(b) (along with the 401k) begins at age 59 1/2, while withdrawing from the 457(b) begins at age 70; which is a substantial difference. With a 457(b), you’d have to wait over 10 years before you can even think about withdrawing from that fund. Honestly, despite the statistics, who knows if you’ll be living until you’re 70. To be reductive and to give a simple answer, most financial advisors would recommend if you had to choose between the 403(b) or the 457(b), you ought to try to maximize your contributions to the 403(b) since you’ll have access to that money sooner AND there are certain provisions that allow you to tap into the 403(b) without a tax penalty.

But again, if you’re a CRNA, you’re at a higher tax bracket. My personal belief is one ought to maximize both retirement vehicles in order to limit your tax liability.

In an upcoming post, we’ll discuss how you can save money by contributing to your retirement.

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