401k, 403b & 457 Plan
Here at District 11 we are proud to offer a variety of tax-deferred retirement plans through payroll deduction to fit your individual needs. It is our belief that these plans provide an important supplement to your primary retirement vehicle, PERA. The District offers 3 tax-deferred retirement plans: 401k, 403b and 457. While each plan offers the primary advantage of long-term tax-deferred investing for retirement, each plan also has unique characteristics to suit you individual needs. The following is a brief description of each plan:
401k - Offered by PERA
The 401(k) plan is a type of employer-sponsored retirement plan in the United States and some other countries, named after a section of the U.S. Internal Revenue Code. A 401(k) plan allows a worker to save for retirement while deferring income taxes on the saved money and earnings until withdrawal. The employee elects to have a portion of his or her wage paid directly, or "deferred", into his or her 401(k) account. In participant-directed plans (the most common option), the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above. Many companies' 401(k) plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401(k) plans, the employer appoints trustees who decide how the plan's assets will be invested. All assets in 401(k) plans are tax deferred. Before the January 1, 2006 effective date of the designated Roth account provisions, all 401(k) contributions were on a pre-tax basis (i.e., no income tax is withheld on the income in the year it is contributed), and the contributions and growth on them are not taxed until the money is withdrawn.
403b - Offered by a variety of Vendors
A 403(b) plan is a tax advantaged retirement savings plan available for public education organizations, some non-profit employers (only US Tax Code 501(c)(3) organizations) and self-employed ministers in the United States. It has tax treatment extremely similar to a 401(k) plan, especially after the Economic Growth and Tax Relief Reconciliation Act of 2001. Simply put, employee salary deferrals into a 403(b) plan are made before income tax is paid on it, and allowed to grow tax deferred until the money is taxed as income when taken out of the plan. Beginning in 2006, 403(b) and 401(k) plans may also include designated Roth contributions, i.e., after-tax contributions, which, if certain requirements are met, will allow tax-free withdrawals. Primarily the designated Roth contributions have to be in the plan for at least five taxable years.
The Employee Retirement Income Security Act (ERISA) does not require 403(b) plans to be technically "qualified" plans, i.e., plans governed by US Tax Code 401(a), but have the same general appearance as qualified plans. The option is available but it is not known how prevalent or if any 403(b) has been started or amended to be ERISA qualified because the main advantage of ERISA plans for participants has been in bankruptcy of the account holder which has been removed by the October 2005 Bankruptcy Abuse Prevention and Consumer Protection Act. However, they are very different in some fundamental ways. To the participant, the plan appears almost exactly the same and the options available are very similar. The only important differences for the participant are some additional ways that they can withdraw employer money, not salary-deferral money, before the typical 59 1/2 age restriction, but only if the plan is funded with annuities, not mutual funds. The government is proposing that this difference be eliminated in proposed regulations that are expected to be finalized in
457 Plan - Sponsored by the State of Colorado and administered by Great-West Life
The 457 plan is a type of tax advantaged defined contribution retirement plan that is available for governmental and certain non-governmental employers in the United States. The employer provides the plan and the employee defers compensation into it on a pre-tax basis. For the most part the plan operates similarly to a 401(k) or 403(b) plan most people are familiar with in the US. The key difference is unlike a 401(k) plan, there is no 10% penalty for withdrawal before the age of 59 1/2 (although the withdrawal is subject to ordinary income taxation).