If you work for a public school, a state or local government, or certain tax-exempt organizations, you may have been invited to participate in a 457(b) or 403(b) plan. Both types of plans are employer-sponsored, tax-deferred retirement plans somewhat similar to 401(k) plans offered by many corporations. You can put money into your 403(b) or 457(b) before your employer takes out taxes, and your investments in the accounts grow tax-deferred until you take the money out. Because taking money out before age 59 1/2 or retirement triggers both taxes and penalties, invest in the plans with a long-term view.
Maximize your contributions. The combination of the tax deduction on your contributions and the tax deferral of your earnings makes both 457(b) and 403(b) plans excellent accounts. As of 2013, you can kick in 100 percent of your earnings, up to $17,500, to either type of account. If your employer offers both types of plans, you can max out both, for a total contribution of up to $35,000 in 2013.
Understand your investment objectives and risk tolerance. Ask yourself what your goals are for investing in your retirement plans. Some investors simply want a safe place to save, while others want to aggressively grow their money. Remember that the flip side of high investment performance is high investment risk. Be honest about how much up-and-down your stomach can handle when it comes to the value of your retirement account.
Review your investment options. Both 457(b) and 403(b) plans differ from individual retirement accounts in that you can't invest in anything you'd like. Your only choices are the investment options offered by your specific plan. Typically, you'll have a variety of mutual funds to choose from, ranging from conservative money market funds to speculative stock portfolios. Your plan administrator will give you information on the past performance and investment objectives of each available fund.
Set up monthly contributions. Your employer will typically give you a form on which you can check off how much of your paycheck you want to put into the plan. If you think it might be hard to max out your contributions at first, start slowly. Once you're used to having money withheld from your check, you can gradually increase your contribution levels.
Allocate your contributions. Based on your goals and the amount of risk you can handle, spread your contributions out among the available offerings. Most employers offer assistance in choosing the proper balance for your investments. Generally, the younger you are, the more aggressive you can afford to be, since you'll have more time to recover from short-term market declines.
Review your portfolio. Over time, your 457(b) or 403(b) account may get out of whack, as certain funds outperform others. Rebalance your investments at least annually, and possibly as much as quarterly or monthly, to keep them in line with your goals and risk tolerance.
- IRS: Retirement Plans FAQs Regarding 403(b) Tax-Sheltered Annuity Plans
- IRS: IRC 457(b) Deferred Compensation Plans
- The State of Delaware 457(b) and 403(b) Deferred Compensation Plans Guide 2012
- Nationwide Retirement Solutions: About Deferred Compensation
- Bankrate.com: Retirement Planning for 20-Somethings
- Wells Fargo Advisors: Investment Objective & Risk Tolerance
- Bankrate.com: The Right Time to Rebalance Your Portfolio
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