408(k) Plan: What it is, How it Works, Compared to 401(k)

A 408(k) plan is a retirement savings plan sponsored by a tax-exempt organization, such as a church, school, or nonprofit organization. It is similar to a 401(k) plan, but there are some key differences.

Who Can Use a 408(k) Plan?

Any employee of a tax-exempt organization can participate in a 408(k) plan. The plan can also be offered to self-employed individuals who work for their own businesses.

How Much Can I Contribute to a 408(k) Plan?

The maximum contribution limit for a 408(k) plan is the same as the limit for a 401(k) plan, which is $20,500 in 2023. However, there is an additional catch-up contribution of $6,500 that can be made for those who are age 50 or older.

How Are 408(k) Plan Contributions Taxed?

Contributions to a 408(k) plan are made with pre-tax dollars, which means that they are deducted from your income before taxes are calculated. This can lower your taxable income and reduce your tax bill.

How Are 408(k) Plan Withdrawals Taxed?

Withdrawals from a 408(k) plan are taxed as ordinary income. However, there are some exceptions to this rule. For example, withdrawals made after age 59 1/2 are eligible for the 10% early withdrawal penalty.

How Do I Roll Over My 408(k) Plan?

When you leave your job, you have the option to roll over your 408(k) plan to another retirement plan, such as an IRA. This is a good way to keep your money invested and avoid paying taxes on your withdrawals.

How Does a 408(k) Plan Compare to a 401(k) Plan?

There are some key differences between 408(k) plans and 401(k) plans. Here is a comparison of the two plans:

• Employer match: 401(k) plans typically offer an employer match, which is a contribution that the employer makes to the employee's plan account. 408(k) plans do not offer employer matches.
• Plan fees: 401(k) plans typically have lower plan fees than 408(k) plans.
• Plan availability: 401(k) plans are only available to employees of for-profit companies. 408(k) plans are available to employees of tax-exempt organizations, as well as self-employed individuals.

Which Plan is Right for Me?

The best retirement plan for you depends on your individual circumstances. If you are an employee of a for-profit company, a 401(k) plan may be a good option. If you are an employee of a tax-exempt organization or a self-employed individual, a 408(k) plan may be a good option.