Other retirement plans: 403(b), 457, TSP, pension, etc
About this video
This video gives an overview of the main types of US retirement plans. It separates defined benefit plans (like pensions) from defined contribution plans, then splits contribution plans into tax-deferred ones (401(k), 403(b), 457, TSP, traditional, SIMPLE and SEP IRAs) and the non-tax-deferred Roth IRA.
You'll be able to
- explain the difference between a defined benefit plan and a defined contribution plan.
- describe what tax-deferred means and why it can be beneficial.
- name several tax-deferred plans and who they are typically for.
- explain how a Roth IRA differs from tax-deferred plans.
Key words
- defined benefit plan
- A retirement plan that promises you a specific payout in retirement, usually based on salary and years of service.
- defined contribution plan
- A retirement plan where you and/or your employer put in set amounts, and what you get later depends on how much went in and how the investments did.
- pension
- An employer-funded, professionally managed plan that promises a set payout in retirement.
- tax-deferred
- You put in pre-tax money now and pay tax later when you take it out.
- employer match
- Money your employer adds to your retirement account based on how much you contribute.
- Roth IRA
- A retirement account where you don't defer taxes, but withdrawals of what you put in can be tax-free.
Transcript
- [Lecturer] There are a lot of different types of retirement plans and we cover them in other videos, but the goal of this video is to just give you an overview. So, there's a bunch of categories. The first category is whether you are guaranteed a certain benefit.
So, you can think of that as a defined benefit plan, or whether you are going to contribute or your employer's gonna contribute a certain amount, so you're defining the contribution, but the benefit might be variable depending on how much, not only how much you contribute, but how well those investments do.
Now, defined benefit plans are less and less common and they typically come in the form of pensions. Pensions are where your employer puts a certain amount of money while you are working. They put into a pension plan that you do not manage yourself. And then, that pension plan is professionally managed and hopefully they grow enough, so that they can give you what they promised you.
So, these are employer-funded guarantees a specific payout in retirement based on salary and years of service. This is often typical of government workers. It might be certain unionized workers. My wife is a physician at the county medical center. She in theory, has a pension.
Now, it's very important to look at the health of these pension plans. Some of them haven't been growing enough or contributing enough to actually deliver on the promises, so that's become an issue over the last couple of decades. But if they're good for it, this is actually a very nice type of retirement to have, because it is more predictable.
But more typically these days, you have defined contribution plans and this is where you and/or your employer are putting a certain amount of money while you are working, investing that money. And then, hopefully, it has grown a good bit and it can be used once you have retired.
Now, there's another subcategorization here of whether it's tax-deferred or not tax-deferred. Tax-deferred means that you can put pre-tax money into that plan, and then you're going to get taxed on the other end when you take it out. Why is that beneficial? Well, your tax rate might be lower when you are retired because you're making less money then.
Why would you wanna do non-tax-deferred then? Well, it might provide other forms of flexibility. We have a whole video on a Roth IRA. But as we can see, there are a bunch of different types of tax-deferred-defined contribution plans. The 401(k) is the most well-known.
It's sponsored by your employer. You can contribute a certain amount. Many employers will also match that amount. Now, you have things very similar to 401(k)s. That might be for, say, if you work at a public school or if you work in the government, or if you're in the military, federal employee, things like 403(b)s, 457, thrift saving plans.
And these all have different policies on what you can put in, what you can take out, who's contributing what. But they all fill into the same category. And similar to that, you have heard of IRAs, investment retirement accounts, that also, other than the Roth IRA, tend to be tax-deferred.
Now, the traditional IRA, we have a whole video on that. You can contribute a certain amount. It gets tax-deferred. Simple IRAs are ones for small businesses, so it can only be for organizations below a certain number of employees. I believe that number is a hundred currently.
An employer match is required. So, the employer is actually going to definitely contribute. They have to contribute to this, but it's the same idea. They're contributing. It is tax-free for you and you also contribute, and you can take it out in the future when you are retired, but then you're going to pay taxes.
SEP IRA is more for self-employed small businesses, and this is also employer-funded. Now, last but not least, and we have a whole video on this, is Roth IRA, where you're not deferring your taxes, but it has other benefits in terms of tax-free withdrawals if you're only taking the amount of money that you have put in and not the gains on it.
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