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Question:


I work for a state college. What is the difference between a 457(b) and a 401(b) retirement plan?
-CaliUniversity


Answer:


There’s no such thing as a 401(b) plan. You may be conflating the 401(k) plan used mainly in the private sector and the 403(b) used at public education institutions. Because you work for a state college, I’ll assume you have a 403(b). To confuse things a bit more, the feds created the framework for a third plan, the 457(b), for other types of state and local government employees and employees of tax-exempt, nonprofit organizations, along with independent contractors.
 
All three types of plans have similar rules and benefits. Employee contributions can be written off taxes, employer contributions are also tax free, and all income and capital gains within the accounts accrue tax free too. Withdrawals are taxable as ordinary income, but as these accounts are intended to be used in retirement, chances are that participants will be in a lower tax bracket by then.
 
The maximum contribution that an employee can make to the accounts for
2012 is $17,000 or $22,500 for participants over 50. That’s an aggregate figure that applies whether the employee has just one account or several from different employers. A key exception is that employees who have a 457(b), in addition to a 401(k) or 403(b), can double up, bringing the maximum possible contribution to $34,000 or $45,000, depending on age, with a tax write-off on all of it.
 
There are some other wrinkles. While participants in 401(k) and 403(b) plans can roll them over into other such plans or into IRAs when they change jobs, someone in a 457(b) can only do a rollover into another 457(b). On the other hand, the 10 percent penalty that applies to withdrawals from the first two types of plan before age 59 and a half does not apply to 457(b) withdrawals.
-Conrad de Aenlle



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