When saving for retirement, where we decide to sock away our retirement savings makes all the difference. Retirement accounts allow us to buy investments that will grow faster than if we left our cash in a savings account or under our mattress.
The retirement accounts and defined contribution plans offered through our employer, usually either a 401(k) or 403(b), are convenient options. Our employer will put a portion of our paychecks into the account for us automatically. All we have to do is set how much to contribute as a percent of our annual salary or a flat dollar amount.
Fun fact: the names 401(k) and 403(b) refer to sections of the tax code from the IRS.
For-profit companies typically offer us a 401(k). We can set up our 401(k) as part of the onboarding process when we start a new job or by reaching out to human resources any time. HR will provide the details about the company's 401(k) plan, and they'll help us make any changes.
Even though our company offers the plan, a third-party plan administrator handles our account, usually a mutual fund company. We can log into their website to see all our account details, even if we no longer work for that employer.
Some employers will even match our 401(k) contributions up to a certain amount. Yes, a company match is basically free money!
A 403(b) has the same basic structure as a 401(k) plan; however, the main difference is that non-profit and government employers offer 403(b) plans. The providers and administrators for these plans are typically insurance companies. As a result, most of these accounts have more limited investment options and offer more annuity products than 401(k) accounts.
While 403(b) plans legally allow employers to provide employer matches, most employers do not offer them. Employer matches for 403(b) accounts could mean losing certain government exemptions that enable these plans to have lower administrative fees.
Something else to keep in mind is that if we have over 15 years of service with certain non-profit or government agencies, we might be able to make additional catch-up contributions to our 403(b) plans that 401(k) plans can't provide.
Setting up a contribution amount for your employer's retirement plan is a convenient way to save for retirement. This eliminates having to transfer funds into an account from your paycheck yourself. Also, it's a good idea to contribute enough to maximize our employer match if they offer one. Otherwise, you'll be leaving some of that free money on the table!