It’s natural for children to want to emulate their parents, but it can be confusing when they don’t know what the best options are. That’s why we’re here to break down some of the key differences between 403b Vs 401k. that children should know about.
401ks are Individual Retirement Accounts that are funded by employer contributions and/or an employee’s earnings. A 403b is a deferred compensation plan offered through an employer or educational institution. As most kids won’t have jobs until they’re older, it’s often more common for them to have a 403b in elementary school or college than a 401k at home with mom and dad.
Here is a rundown of key differences between the two:
401ks: Get Taxed at Retirement Tax rates on 401k contributions and earnings are usually lower than the 10% federal income tax bracket. There may be deductions and credits, but there is no “catch-up” deduction that can allow seniors to earn thousands in 401k contributions and still only pay taxes equivalent to the lowest tax bracket. 403bs: Get Taxed At Retirement Often, their contributors pay no taxes when their money is withdrawn later in life with a check from the plan at retirement. However, there are taxes when they receive such a check or loan from the plan in retirement if they’ve chosen to withdraw different amounts than what was contributed at different times. It’s important to know if withdrawing more than you’ve contributed will push you into a higher tax bracket.
Qualifying for Contributions Is Usually Easier With a 401k You can contribute to a 401k if you’re over 18 years old, have money withheld from your paycheck, work at least 1,000 hours in a year and are not already participating in an employer retirement plan. It’s sometimes easier for children to qualify for 403b contributions since they’re most often associated with educational institutions that don’t usually consider working hours or participation in another 401k plan when assessing them. You can also contribute with after-tax dollars if you’re younger than 70 1/2.
Withdrawals Are Taxed Again For Younger Adults If you’re over age 59 1/2, you must pay taxes on 401k earnings and any contributions you made based on your earnings all at once. However, there is no additional tax if you withdraw the money under the age of 59 1/2. 403bs are designed for this; most plans allow individual account owners to withdraw money without paying any tax until they turn 70 1/2 or make another withdrawal before that date.
There are other ways to get the same tax breaks that you would get with a 401k including either converting 403b funds into a traditional IRA or making an immediate withdrawal from the plan. Still, it’s important for children to understand these distinctions in their own financial futures.
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withdrawing money from a 403b without penalty until age 70 1/2 is also possible if the plan allows you take money out before that date. You can find out how to calculate how much you can take out by contacting the IRS directly.
When it comes to a 403b vs 401k for your children’s money, both plans have their benefits. A comparison of one or the other is often dependent on what your child is actually saving for and the investment vehicles available through each plan. An important thing to remember is that you can always roll a 403b over into a traditional IRA if needed. Or, you may choose to rollover a 403b into a Roth IRA so that withdrawals in retirement are tax-free. This will depend on how long until retirement and your child’s age.