Setting up your 401k or 403b is an easy, simple process that every nurse or nurse practitioner needs to do when they first start a new job. A 401k or 403b offers many benefits including tax savings and asset protection. A 401k or 403b is an essential tool for any nurse or nurse practitioner pursuing financial independence.
Maybe you’ve been with your current employer for some time and haven’t set up your 401k or 403b. If so, you’re probably missing out on free money that your employer will give you. You are also definitely missing out on potentially significant tax savings from your 401k or 403b.
What is a 401k or 403b?
A 401k/401b is a type of retirement savings account. Saving in a retirement account means saving towards your future. This means the money is generally designated for when you decide to retire. This type of savings might automatically turn you off towards saving your precious paycheck in a retirement account. I hope I can convince you otherwise.
I usually view different savings accounts as bucket types. Your standard checking and savings account at the bank is the most common bucket type. You can easily accumulate money in a checking or savings account and hopefully receive a small amount of interest every month. Interest in a normal checking or savings account results in taxes every year.
Bottom line: Your 401k or 403b is a different savings bucket with several significant advantages, most notably tax savings and asset protection.
Tax Savings from Your 401k/403b
A retirement savings account usually has some tax advantage attached to it otherwise most people wouldn’t commonly use them. Common retirement savings accounts include the IRA, Roth IRA, 401k, and 403b. There are other types of retirement accounts but these are the most common ones that you’ll likely run across and use.
A 401k or 403b is a retirement savings account that allows you to save a portion of your paycheck before your employer takes out income tax. This results in you paying less income taxes every year. The 401k and 403b got their names from specific tax codes in IRS tax laws. I guess nobody had any original, creative names from these types of accounts.
For example, if you save $10k in your 401k during 2020 from your $70k salary, you only have to pay income taxes on $60k rather than the full $70k. This is a huge benefit! Of course, there’s a catch to this benefit. You have to pay income taxes when you withdraw the money in retirement, but hopefully this will be less than what you would’ve paid.
As for the primary difference between a 401k and 403b, the 401k is a common type of retirement savings account that for-profit companies offer to their employees, and the 403b is a common type of retirement savings account that nonprofit companies can offer to their employees. They essentially operate in a similar way and have the same limitations meaning you can only contribute a certain amount ($19,500 in 2020) to both types of accounts during the tax year. Other small differences exist but that’s beyond this setup guide.
Bottom line: The 401k and 403b are tax advantage retirement savings accounts that companies offer to their employees primarily providing you tax savings benefits.
Additional benefits of Your 401k/403b
The 401k and 403b isn’t just a great retirement savings bucket that offers you tax benefits. They also have some additional benefits. All 401k programs and many of the 403b offerings also have asset protection built into them.
Protect Your Assets
Asset protection means a debt collector can’t generally take or tap into your 403k or 403b money savings. This also usually means that if you declare bankruptcy for some unforeseen reason, you get to keep your 401k and 403b money.
This might not seem like a big deal when you’re first starting out, but over time as you save the maximum amount every year and that amount continues to grow with compounding interest, this bucket of money can become quite large.
Asset protection is important for nurses and especially for nurse practitioners due to the constant threat of a lawsuit. Most healthcare lawsuits don’t end up tapping into your personal net worth, but occasionally they do have devastating effects if you don’t have asset protection planning in place.
A basic and easy asset protection plan everyone, especially healthcare providers, should implement is to save as much as possible in your 401k or 403b since creditors cannot tap into this account. Of course, the IRS can always tap into your 401k or 403b account if you commit tax fraud, but most of us hopefully do not have to worry about tax fraud.
Bottom line: 401k and 403b accounts offer significant benefits in asset protection against lawsuits and debt collectors.
An additional benefit of a 401k or 403b is the ability to take out a loan against your 401k or 403b. I don’t recommend this as you lose valuable time that your money could be growing in the market. But in instances of financial hardship with no other option, this may be a last resort safety valve.
With coronavirus, the CARES act allows you to take out a significant loan against your 401k for coronavirus related hardships. Once again this is not a great option but a potential benefit in rare, specific situations.
4 Steps in setting up your 401k or 403b
1. Find out your 401k or 403b benefits from HR.
Almost all employers have some type of retirement plan. Many healthcare groups offer the 401k or 403b savings plans. The 401k/403b plans are usually briefly discussed during your nursing orientation. This is often at the end of the day and usually most people are ready to leave and don’t pay much attention to this part of orientation. But this can be the most financially beneficial part of orientation for you in the long run. Usually HR includes a sheet or possibly a booklet regarding the 401k or 403b plan that is offered.
Bottom line: Figure out whether your company offers a 401b or a 403k and the specific details including employee match, plan provider such as Fidelity or Vanguard, and vesting period.
2. Figure out how much you need to contribute to get the maximum employee match.
All 401k providers have a website where you can decide how much of your paycheck you would like to contribute each pay period to your 401k or 403b savings plan. Try to at least match the percentage that your employee is willing to match. For example, if your employer matches up to 7% total salary of your contributions, then set your paycheck contribution to 7% in order to get the full employer match.
The employer match is free money on the table that many nurses and other employees do not take advantage of. This is basically free money that you have no good reason not to take advantage of. There are not many free lunches in the working world but this is potentially one of them for you.
Sometimes you have to work for a certain time period to get 100% vested. Being vested just means you get to keep the employer contribution if you leave your job for any reason.
Bottom line: Contribute at least enough to get the total employer match.
3. Review the investment options in your 401k or 403b program.
Once you contribute to the 401k savings bucket you have to select the type of investment you want to contribute your 401k money towards.
Every employer sets up their 401k or 403b program with a specific range of investment options from simple cash to aggressive mutual funds. Many employers probably just include the default investment options that the 401k provider recommends.
Investment options in a 401k or 43b are not created equal or do not always have your best interests in mind. By law, employers should set up their investment options in the 401k with your fiduciary interests in mind. This means they should be looking out for you and offering you a good fair range of reasonable options.
Unfortunately, 401k and 403b programs are somewhat of an afterthought, it seems, in employer benefit offerings, so investment options are likewise often limited and sub-optimal.
After reviewing your investment options, select the appropriate investment option you would like to use your 401k savings for. Your written investment plan should include what specific investments you want to have in your savings.
I would suggest that most people just select a target date fund which most 401k/403b programs now have. If you want to get more complicated and potentially save on annual fees, then the other primary option I would recommend is the S&P 500 index fund as this is usually less fees per year than the target date funds.
Bottom line: Figure out your written investment plan. Most should select a target date retirement fund in your 401(k). For the more adventurous, consider an S&P 500 index fund.
4. Set up your contributions to invest automatically
After selecting which fund you want to invest your 401k savings into, set up automatic contributions every time you invest money into your 401k to automatically invest into the funds you select. For many this might be a redundant step if you’ve got a good 401k or 403b provider, but it’s not a guarantee and a crucial step that you should check.
You want to avoid having money just sitting in cash in your 401k unless that’s part of your investment plan. You have a regular bank account for your cash savings. The more time your money is in the investment market, the more growth potential it has.
Bottom line: Automate your 401k investments to avoid building up cash savings in your 401k.
Watch your 401k grow
That’s all it takes, 4 easy steps and your 401k is set up. Now you get to enjoy the fun part of watching your 401k account grow month by month.
Better yet, forget that you have a 401k once it’s automated, and then check back once a year to make sure everything is running smoothly. You’ll be shocked at the massive amount of money you will have saved.
Once a couple of years go by, you’ll notice that your 401k is growing faster than the money you’re saving in it. This is due to the power of compounding interest. This is why we invest in stock market funds such as a target date retirement fund or the S&P 500 index fund.
This puts our money at work for us instead of just sitting there collecting dust like most of our current checking and savings accounts do. Setup your 401k or 403b and reap the many benefits including tax savings and asset protection.