CARD T175
401(k) Plan
An employer retirement plan allowing employee salary deferrals. It may offer traditional, Roth, and employer contributions under its terms.
How it works
A 401(k) permits employees to defer salary under an employer plan. Traditional deferrals generally reduce current federal income-tax wages; designated Roth deferrals are included currently, with qualified distributions later tax-free. Employers may contribute under plan terms. Employee elective deferrals are fully vested; employer contributions may have vesting requirements. Annual limits change, so use the tax year specified. [3]
An employee contributes through payroll and the employer adds a match. The employee’s own deferrals are not forfeited merely because employment ends.
A match is an employer contribution, not a reason the employee’s own deferrals become unvested.
CARD T176
403(b) Plan
A retirement plan available to certain school and tax-exempt-organization employees. It allows eligible contributions under special tax rules.
How it works
A 403(b) is available to eligible employees of public schools, certain tax-exempt organizations, and certain ministers. Funding may use permitted annuity contracts or custodial accounts, among authorized arrangements; it need not be an annuity in every case. Plans may offer traditional and designated Roth deferrals. Contribution and distribution rules apply independently of the investment selected. [3] [34]
An eligible public-school teacher directs salary into the school’s 403(b) custodial mutual-fund account.
The traditional name “tax-sheltered annuity” does not mean every 403(b) must invest in an annuity.
CARD T177
Rollover
Moving eligible retirement money to another eligible retirement arrangement. Meeting the rules can preserve tax deferral.
How it works
A rollover moves an eligible retirement distribution to an eligible receiving arrangement. A direct rollover sends funds to the receiving plan or IRA and generally avoids mandatory withholding on that transfer. A distribution paid to the participant generally must be rolled over within 60 days; taxable eligible employer-plan distributions paid to the participant generally face 20% withholding. Replacing the withheld amount can be necessary to roll over the full gross distribution. RMDs are not eligible rollover distributions. Roth conversions can create current income. [3] [6] [7]
A $10,000 eligible taxable plan distribution paid to the employee has $2,000 withheld. To roll over all $10,000 within the deadline, the employee needs $2,000 from other funds in addition to the $8,000 received.
Withholding is not necessarily the final tax; a direct rollover and a Roth conversion are not always tax-identical.
CARD T178
Vesting
Having an ownership right to a retirement benefit that is not lost merely by leaving the employer. Employer contributions may become vested gradually through years of service.
How it works
Vesting determines how much of a retirement benefit belongs to an employee even after leaving the job. Employees are fully vested in their own salary contributions and associated earnings. Employer contributions may belong to the employee immediately or become theirs over a permitted service schedule. For example, 40% vesting in $10,000 of employer contributions means $4,000 is vested under that simplified calculation. Vesting does not promise a stable investment value or immediate withdrawals without tax or plan restrictions. [8]
An employee is 40% vested in $10,000 of employer contributions. The vested employer portion is $4,000; the employee’s own fully vested contributions are a separate amount.
Ownership of a benefit and immediate access to it are different questions.
APPLY THE TERMS
Practice questions
Select an answer, then check it to see why each option is right or wrong.
T175 · 401(k) Plan
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T176 · 403(b) Plan
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T177 · Rollover
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T178 · Vesting
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Sources & further reading
Original explanations and practice scenarios informed by the following regulatory, legal, and product resources. State examples are not presented as nationwide deadlines or requirements.