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403(b) plans are subject to a variety of special rules, and they are limited to investing in annuities and mutual funds. The plans are sub- ject to fewer discrimination rules than 401(k) plans and are more flexible than 401(k) plans in many ways. Any salary reduction con- tributions you made to a 403(b) plan will reduce the contribution you make to a 401(k) plan. However, any contributions made to a 457 plan (beginning in the year 2002), do not limit the amount that may be contributed to a 401(k).

There are some other characteristics of 457 plans that should be considered. First, these plans don’t offer the same safeguards that 401(k) and 403(b) plans do. Qualified plan assets are segregated from the employer’s assets. If the employer becomes bankrupt, your bene- fits are still safe. Assets of governmental 457 plans must also be held in a separate trust for the participants’ benefit. But a tax-exempt orga- nization cannot set up a separate trust. For this reason, you should be very certain that your tax-exempt organization is financially sound before contributing to its 457 plan, Finally, assets in a 457 plan spon- sored by tax-exempt organization cannot be rolled over to IRAs when you leave employment. A governmental 457 plan can be rolled over.

Let’s consider how participating in a 401(k) can be beneficial, not just for planning for your retirement, but also for decreasing your current income tax due. John Client has been working for the same company for about 20 years. As a result, his salary is quite high, and so he feels that he can contribute the full amount ($11,000 for the year 2002) to his 401(k) plan at work. Unfortunately for John, his employer doesn’t offer any type of match. With John’s salary of $125,000, he finds that he is in the 30% (using year 2002 tables) tax bracket. By diverting $11,000 from his salary into his 401(k), he is saving himself $3300 in taxes ($11,000 30%) since he is reducing his income to $114,000. Therefore, it could be said that he is con- tributing $7800 to his 401(k) while the IRS is contributing $3300 because of the tax savings.

The more you are able to contribute, the faster your account will accumulate. Add in any match that your employer provides, and that will just increase the amount of saving going on for your retirement. Participating in a 401(k), 403(b), or 457 is an excellent way to beef up your retirement nest egg, while enjoying some tax savings in the meantime. Don’t worry if your employer doesn’t offer any matching

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