It may be surprising to some that the 401k, 403b, and Keogh plan are powerful investing weapons. These plans have two main advantages:
- Tax advantages — contributions occur before the money is treated as income by the IRS. In other words, taxable income is reduced.
- Tax-deferred growth — contributions in these plans grow tax-deferred and are only taxed when funds are withdrawn.
A 401k plan is an employer-sponsored retirement plan. Some other advantages may include company matches, borrowing privileges and portability.
- Company matches. Many employers match employee contributions.
- Borrowing privileges. Many employers allow employees to borrow from their accounts.
- Portability. Employees can roll over all the proceeds from the 401k into another plan when they change jobs.
Some disadvantages may include vesting, investment options, early withdrawal penalty, and loan payback limitations.
A 403b is identical to 401k. It is set up for the employees in non-profit organizations or public schools. They can contribute a slightly larger percentage of their income to 403b than they can to 401k.
A Keogh plan is a tax-deferred retirement plan designed to help self-employed individuals who earn self-employed income establish a retirement savings program. Self-employed individuals can set aside 20-25% of the self-employment income in a Keogh retirement plan.