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Deferred Compensation 

 

What is a 401(k) plan? A 401(k) plan is a retirement savings plan designed to allow eligible employees to supplement any existing retirement and pension benefits by saving and investing your taxadvantaged dollars through voluntary salary deferral. You may select from pre-tax and after-tax (Roth 401(k)) deferral options. Pre-tax contributions and any earnings on contributions are tax-deferred until money is withdrawn. Distributions are usually taken during retirement, when many participants are typically receiving less income and may be in a lower income tax bracket than while working. Distributions from pre-tax contributions are subject to ordinary income tax. If taken before you reach age 59½, distributions may be subject to an additional 10% federal early withdrawal tax.

 

What is a Roth 401(k) contribution? A Roth 401(k) contribution is an option under the 401(k) plan that allows eligible employees to supplement any existing retirement and pension benefits by saving and investing after-tax dollars through voluntary salary deferral. Contributions and any potential earnings can be distributed on a tax-free basis after you have reached age 59½ and after the required five-year holding period has passed. You have to designate all or a portion of your 401(k) elective deferrals as Roth contributions.

 

 

What is a 457 deferred compensation plan? A governmental 457(b) deferred compensation plan (457 plan1 ) is a retirement savings plan that allows eligible employees to supplement any existing retirement and pension benefits by saving and investing pre-tax dollars through a voluntary salary contribution. Contributions and any earnings on contributions are taxdeferred until money is withdrawn. Distributions are usually taken during retirement, when many participants typically receive less income and may be in a lower income tax bracket than while working. Distributions are subject to ordinary income tax. The early withdrawal penalty does not apply to 457 plan withdrawals. The 457 deferred compensation plan does not offer a Roth option.

What is a 403(b) plan? The 401(k) and 403(b) are very similar in design. Both are deferred compensation plans with immediate vesting. The main difference is the financial institutions that participate in the plans. Empower is the only provider in the 401(k), whereas the 403(b) has the three ORP providers. Therefore, an employee could elect to contribute supplemental/voluntary funds to the same financial institution that they selected for the ORP, should they participate in ORP.

 A chart displaying the differences between the 403(b) and 401(k) is below:

 

403(b)

401(k)

Providers

TIAA, VALIC, VOYA

Empower

Eligibility

All active higher education employees

All active state employees

Contribution Source

Employee deferrals

Employer and Employee deferrals

Investments

Investments are self-directed

Investments are self-directed

Distribution Options

Based on the individual’s account balance. Individuals are eligible to select: single life annuity, joint and survivor annuity, lump sum payments, periodic payments, and required minimum distribution payments, among others

Based on the individual’s account balance. Individuals are eligible to select:  lump sum payments, periodic payments, and required minimum distribution payments, among others

Vesting

100% immediate

100% immediate