Which retirement plan should I choose- 403(b), 457(b), or 401(a)?
The company that I work for offers 403(b), 457(b), and 401(a) retirement plans. Which one is the best plan, or is it wise to open all three accounts? I have a 401(k) plan with a different company that I work for and I contribute 6% of my salary to this plan. I also have a Roth IRA account and I make the maximum contributions every year. I'm 21 years old and I do not plan on staying with both companies for the long-term. I have no debt. I have an emergency fund, and about $104,000 in Vanguard's mutual fund managed by a financial advisor.
Great question, and it gets a bit confusing when you have all of these offerings. Typically you would see a 457 and 401(a) combined, because a 457 only allows $18,500 in total contributions. In a 401(k), you can contribute $18,500 and then the employer can add on top of that in profit sharing. So employers will layer on a 401(a) to a 457 so the total contributions maxes out at $55,000 just like a private company's 401(k).
Double check for me if the 457 is a 457(b) or 457(f). You said 457(b) which would be great. If it turns out to be a 457(f) then those come with additional rules, because they are intended for highly compensated individuals and typically require you work a certain number of years. If you are down to a 403(b) or 457(b) then check the investment options. 403(b) plans are unfortunately still often in group annuity plans which are more expensive. If one is a group annuity and one is a mutual fund plan then go with the lower cost option.
It is very important to note here than 457(b) plans have one really nice perk. In other pre-tax accounts (i.e. 401(k), Traditional IRA, 403(b), etc) you are penalized for taking withdrawals prior to 59 1/2. You are NOT penalized with a 457(b). So if all else is equal do the 457(b) with your employer contributing to the 401(a).
Hope that was helpful, let me know if I can be of further help.
Matt Ahrens, CIMA®
While there are some differences between the plans, it is the underlying investment options and fees which should really drive this decision. Each of the plans will have predominantly the same tax advantages; so instead look at the types of investments and the expense ratios of the funds you have access to in the 401(k), 403(b), 457(b) and 401(a) plan.
If your 401k plan has significantly cheaper fees and better investment options, then you should max out the 401k first ($18,500 in 2018) before looking to invest in the other plans. 403b and 457 plans, for example, often limit you to investing in high cost annuities, which will have a hard time outperforming cheaper investment options net of fees.
If all the plans have similar investment options and fees, then I recommned funding the 457 plan. These plans allow you to take penalty-free withdrawals before age 59 1/2. If you retire young, the 457 can be a beneficial source of income while you wait to have access to your 401k and IRA plans. You will still have the normal income taxes which are due on withdrawals at any age, the same as a 401k.
I also recommend talking with your financial advisor who is managing your Vanguard mutual fund. They should be knowledgable about the account details and be able to give you more accuarate advice based on your entire financial picture. If they aren't able or willing to offer advice on your entire financial picture, you may wish to consider if working with a different advisor would be better for your comprehensive financial plan.
If your focus is only on the addition of a plan then the 457(b) may be your best choice because of the ability to withdraw without penalty before 59 1/2. BUT the bigger question given the information you shared is where and how to bext maximize your retirement savings. You have a great start at your age with the account at Vanguard. Congratulations! The next layer to the emergency fund should be trying to maximize your retirement savings. Are you reaching your $18,500 limit with the current 401K? Can you? Does the 401K offer a Roth 401K option? If so, consider splitting your retirement savings strategy between an after-tax Roth 401K contribution and a pre-tax contribution in any of the other plans. Your overall goal in selecting a plan is not necessarily to add more plans, but to put away as much as allowed toward your retirement today.
No one knows where tax rates will be by the time you retire and you likely in a low tax bracket now. So while it feels appealing to get a tax deduction for your contributions, as your income grows and you move to higher tax brackets, you will really appreciate the after-tax contributions you make today to a Roth 401K. Like your Roth IRA, your after-tax contributions ina Roth 401K grow tax-free and can be withdrawn completely tax free in retirement.
Finally, if you focus your retirement contributions with one company, when you leave you may have enough in the plan that you are not forced to roll the funds out of the plan. This is nice flexibility, becuase in your next job, you want to be able to compare which plan has the lowest fees, the investment choices that best fit you and the rebalancing/allocation options that are most flexible. You may choose to combine all in to the new retirement plan, but you alternatively may decide to leave the funds behind in the first plan if it proves to be more attractive.
While a 457(b) may have a higher catch-up contribution limit (3 years before retirement), a 403(b) will often have much better investment options. A 401(a) typically has less flexibility and usually is more beneficial to an employer versus an employee. Note that a managed ETF normally has advantages over managed mutual funds.
Generally you should select the plan which has the best custodian. For example, many 403(b) plans have the option of TIAA-CREF which pays a higher interest rate for its TIAA Traditional Annuity than most other stable-value or similar funds with a stable principal and no downside risk. For tax purposes, if you are a clergy person, then a 403(b) is clearly best since you are permitted to make withdrawals tax-free upon retirement, but that seems unlikely to be the case for your profession. I assume that you work for some kind of non-profit organization, so another benefit of a 403(b) is that you may be able to continue to contribute to the same custodian even after you switch jobs in the future. This seems likely given your young age and the fact that you will probably end up with many different jobs in your career.
Be sure to carefully look at the fund choices available for each of the above. Whichever has the widest range, has the lowest fees, and the fewest investment restrictions is probably best for your situation.