What is 401(k) and 403(b)

What does the k in 401 k stand for?

Simply it is the tax code - think of it as an outline numbering - 401 is the 401st section and "k"is the subsection number/letter. The K doesn't stand for anything that starts with the letter K or 1000 increments. It stands for the (k) section of the 401st tax code section that lets employees contribute to a retirement plan and not be taxed on what they contribute.

What is 401 K or 401 B retirement plan?

401 K

A qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Caps placed by the plan and/or IRS regulations usually limit the percentage of salary deferral contributions. There are also restrictions on how and when employees can withdraw these assets, and penalties may apply if the amount is withdrawn while an employee is under theretirement age as defined by the plan. Plans that allow participants to direct their own investments provide a core group of investment products from which participants may choose. Otherwise, professionals hired by the employer direct and manage the employees' investments.

A 401k retirement plan is a tax qualified deferred compensation plan where an employee can elect to have the employer contribute a portion of his or her cash wages to the plan on a pre-tax basis. Elective contributions are not subject to income tax at the time of deferral and are not reflected on the form 1040. They are subject to Medicare, Social Security, and Federal Unemployment Tax and are included as wages for those deductions.

401 B

Questions about the elusive 401b retirement plan have been cropping up on the web and finding information regarding its form and structure is difficult. As of 2010 it is no longer available as a 401b. The 401a and 401b retirement plans were the for-runner of the current 401k retirement plan offered by most employers today. The plans were offered from the late 1990's to 2002.

The term 401b refers to the IRS tax code (401 is the section and b is the paragraph), however, the codes for the original plans are no longer available to view. Both the 401a and 401bretirement plans were replaced by the 401k and are governed by the same regulations regarding deferrals and mandatory withdrawal at age 70 ½.

A 401b retirement plan is often confused with the 403b retirement plan. The 403b retirementplan is most often a tax-sheltered annuity account or custodial account invested in mutual funds. It is offered only to school employees, non -profit organizations or ministers.

If you are a participant in a 401b retirement plan it will simply function the same as a 401kretirement plan unless there are specific restrictions in the original setup. If you have more questions your financial advisor or tax consultant will be able to guide you.

What is tax rate on 401 k?

The great thing about traditional IRAs and 401(k)s is that the earnings are tax-deferred. You don't have to pay taxes on dividends, capital-gains distributions or profits when you sell the investments as long as you don't withdraw the money from the account. When you finally do take the money in retirement, it is taxed at your income-tax rate, which can be from 10% to 35% depending on your income. After you retire, your income-tax rate is likely to be lower than it was when you were working.

But the portion of your withdrawals that is taxed may be different for your 401(k) than it is for your traditional IRA. If you've only made pre-tax contributions to the account -- which is the case for many 401(k) participants -- then the entire amount you withdraw will be taxed. But if you've made any non-deductible contributions -- common for IRA participants with income above the cut-off for deductibility -- then you'll owe taxes only on the earnings from those contributions, but not the contributions themselves.

If you withdraw money from several traditional IRAs to which you made both tax-deductible and non-deductible contributions, then the portion that escapes taxes is based on the ratio of non-deductible contributions to the total balance in all of your IRAs. See The Taxing Side of IRA Conversions for more information.

And if you have any Roth IRAs, the tax calculation becomes much easier. Your Roth withdrawals are 100% tax-free as long as you're at least age 59½ and have had a Roth for at least five years.

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Where can you get a retirement plan?

There are many places to get help with your retirement planning. If you're a do-it-yourself kind of person, or you're just looking for some basic guidance, you can check out online resources to learn the basics (you're off to a good start!), and enter some of your numbers into some online calculators to see where you stand.

If you have a retirement plan through your employer, they might offer some free seminars or classes on retirement planning that you should take advantage of. Check with your human resources department. Many 401(k) plans also offer varying types of advice and guidance, ranging from tools and calculators to help you plan, to target-date funds or managed accounts - if you'd rather not make your own investment choices. In some cases, you might also have access to a financial adviser. Fees can vary widely for managed accounts and advice, so make sure to ask before you sign up.

If you feel you really need some one-on-one help, or you have substantial assets that you feel require professional management, you might want to consider hiring a financial planner.

The most important thing to remember is that you need to save as much as possible for your retirement - and you should start as soon as possible. Don't get paralyzed by fear or indecision. Just use the resources available to you, save early and save often!