Financial Literacy for Students: Retirement

A 401(k) and a 403(b) are employer sponsored tax advantaged retirement savings plans.

The difference being that a 401(k) is used by employees of companies in the private sector, while a 403(b) is strictly for employees of government and non-profit organizations. 

Because these are employer sponsored plans, many employers will contribute, or match your contributions with no additional cost to you. Check with your organization to see if they offer these types of plans. 

Withdrawals:

• 401(k) Early Withdrawal Rules
  • If you make a withdrawal before age 59 1/2, those funds are subject to a 10% early withdrawal penalty
  • You will also likely have to pay both federal and state income taxes on these funds
• 403(b) Early Withdrawal Rules
  • If you make a withdrawal before age 59 1/2, those funds are subject to a 10% early withdrawal penalty
  • You will also likely have to pay both federal and state income taxes on these funds
  • You can also make withdrawals in some situations, such as end of employment, disability, financial hardship, or death
• Some plans will allow you to take loans from these accounts, but you will have to pay back these funds like with any loan 

Contribution Limits:

• The contribution limit for both types is $23,500 if you are under the age of 50 years old

Tip:

• Most financial advisors recommend contributing AT LEAST the same percentage that your employer is willing to match, to get the best bang for your buck

Social Security is something you contribute a small percentage of every traditional paycheck into. By contributing to Social Security, you earn a Social Security Retirement benefit.

This benefit is a monthly check to replace some of your income when you start working less or stop working altogether. It may not cover all of your monthly expenses, so it is important to find other ways, like building other forms of retirement savings, to help pay your monthly expenses.

You can start receiving Social Security as early as age 62. However, you are not entitled to your full benefit until you reach the legal retirement age (currently 67 years old). Or you can delay receiving benefits up until age 70, to earn additional delayed retirement credits.

For more information about Social Security, visit the Social Security Administration website

IRA stands for Individual Retirement Account. This is a tax advantaged account that is personal to you, it can only have one person's name on it. You control this account, it is not through your employer.

The main difference between a Traditional IRA and a Roth IRA is when you pay taxes on the money you contribute.

You don't pay taxes on the money you put into a Traditional IRA, but you do pay taxes on the money when you withdraw it.

You put already taxed money (money after you get paid) into a Roth IRA, which you then don't have to pay taxes on when you withdraw it. 

Withdrawals:

• Traditional IRA - You must wait until you are 59 1/2 to withdraw funds without any penalties. There are some exceptions to this rule in certain qualifying circumstances
• Roth IRA - You must wait until you are 59 1/2 to withdraw funds, and have held the account for at least 5 years without any penalties
• You can withdraw from either type of account at any time, but there will very likely be penalties, and tax implications

Contribution Limits:

• The contribution limit for both types is $7,000 per year as of 2025, or $8,000 if you are older than age 50

A Simplified Employment Pension (SEP) IRA allows employers to contribute to a Traditional IRA set up for an employee. This business can be of any size, even those with one employee, themselves. 

This type of plan is most often utilized by those who are self employed, as they may have no other employer contribution retirement plan.

For more information, visit the IRS Simplified Employee Pension Plan page.