Do you have a qualified retirement account such as a 401(k), 403(b), 457 or TSP? Do you know what the rules are and how much your account will grow if you keep on contributing? AWESOME spreadsheet to help you see those numbers grow!

RE402: Qualified Retirement Accounts

If you’re just stopping by for the first time, this is a class in a series of classes over the next few months which will culminate in the development of a complete financial plan.  Stop by HERE for a complete list of classes currently available and HERE for more information about the website.

Class Objectives: To learn about the benefits of investing money in qualified retirement accounts as well as calculating the growth of contributions until retirement and distributions during retirement.
Prerequisites: SA302 Investing Basics: Time Value of Money and RE401: Calculating Retirement Needs
Handout: none
Assignment: Download the retirement growth spreadsheet for Excel| Google Docs


Have you ever actually thought about WHY you should put money in a retirement account instead of just investing it yourself in a brokerage account? Retirement accounts place so many restrictions on being able to pull out your own money that it almost seems ridiculous. For young people especially, it can seem crazy to put your money in knowing that you aren’t allowed to touch it without penalty for forty years. Yikes.

There actually is a good reason that there are so many restrictions and yes, these accounts really are worth investing in! The value and benefits of investing in retirement accounts are nearly all tax related:

  • Employer-sponsored plans often offer matching contributions (which are tax-deferred to the employee).
  • Money contributed is taken out pre-tax for a traditional 401(k), 403(b), or 457 plan. Since tax isn’t deducted from the contributions initially, there is more money in the account to earn income and grow (these initial contributions are tax-deferred).
  • Investment income and growth are not taxed until the money is withdrawn from the account, ideally in 30 years or more (this is referred to as tax-deferred).
  • For a Roth 401(k), money is taken out after tax, but income and growth are never taxed after that contribution (this increase after contributions is considered tax-free).  We will talk more about Roth options in the next class.

Because the tax benefits are so advantageous, they do have significant restrictions on these accounts including:

  • A penalty of 10% applies to early withdrawals (before age 59 ½) with few exceptions
  • Funds in employer-sponsored plans are not accessible for withdrawal except under certain hardship requirements (excluding loans).
  • Contributions are limited (discussed below)
  • Mandatory minimum withdrawals are required at age 70 ½


A simple example that shows the power of these accounts is shown in comparing a basic brokerage account with a tax-deferred qualified retirement plan.

Assume that you’ve completed your annual budget and determine that you have $3,000 left to invest.

Option 1: You decide to invest the $3,000 in a taxable brokerage account.  We will estimate a 7% return, however we need to adjust that return for taxes by taking the 7% and multiplying it by 1 minus the tax rate.  We’ll assume that the tax rate on investment income will stay around 15% for most taxpayers.  So, the adjusted return will be 7*(1-.15) = 5.95%.

Following our time value of money calculations, you’ll have $5,347 in your brokerage account after 10 years.

Option 2: You decide to allocate all of these funds instead to your employer-sponsored 401(k) plan.  However, because this contribution will be taken out pre-tax from your paycheck, you are actually able to contribute $4,000 (assuming a 25% federal tax rate). This is calculated by taking the $3,000 available and dividing it by 1 minus the tax rate ($3,000/(1-.25). The 7% annual return does not need adjusted because the money grows tax-deferred.

Based on time value of money calculations, you’ll have $7,869 in your retirement account after 10 years.  However, you’ll have to pay taxes on that money when you withdraw it.  Assuming you’re still in a 25% federal tax bracket, your after-tax balance will be $7,689 less the 25% taxes resulting in a $5,767 balance available for retirement.

The difference between the accounts is $420. The larger the time horizon, the more pronounced the differences are between taxable and tax-deferred accounts.


Qualified retirement accounts are simply employer-sponsored plans that meet IRS requirements to be able to give tax-advantaged benefits to participants.

The names by which we refer to these plans actually corresponds with the IRS code that allows them.  We will be covering the following types of qualified retirement plans in this class:

401(k) Plans: for-profit businesses in all types of industries

403(b Plans: governments, schools, hospitals, and churches

457 Plans: state & local public governments, certain other nonprofit entities

Thrift Savings Plan: federal government or military

Money is taken directly out of the employee’s pay and placed in a plan that offers investment options to grow these contributions until retirement age.  In addition, most employers also contribute to the plans through a matching contribution.


Employee and Employer Contributions

Because of the tax benefits received when contributing to these accounts, the IRS limit contributions so that people are not allowed to shelter too much of their income from federal income tax. Employees are allowed to contribute $18,000 for 2017 as well as $6,000 catch-up contribution if 50 years old by the end of the year.

Employers can contribute an additional amount up to a maximum of $54,000 (both employee and employer combined). The maximum is $60,000 for employees 50 years and older.

457 Plan: There is a special rule that allows for participants to also contribute to a 401(k) or 403(b) plan (if also available by the employer).  The maximum applies to each plan separately, so participants can max out contributions to both. In addition, the 457 plan also has a special rule that you can make other special catch-up contributions in the 3 years leading up to your retirement.

Employer Matching

As part of a complete compensation package, many employers match contributions to the retirement plans.  Because pension plans are now very uncommon, this is a much less expensive way for them to provide retirement compensation.

Most employers, though, will contribute nothing to the plan if you don’t contribute yourself.  Most commonly, they contribute based on the amount that you contribute to your plan up to a maximum. Typical matching contributions are 50% or 100% up to a certain dollar or percentage limit.  We personally receive a 4% match on up to 4% retirement contributions.  That’s another “free” 4% of our salary!

For example, a common matching program is for the employer to contribute 50 cents for each dollar that an employee contributes up to 6% of their pay.  So, if you make $5,000 per month and contribute 6% ($300) to the retirement plan, the employer would contribute an additional $150.

TSP: The thrift savings plan offers a 1% contribution, regardless of employee contributions. Then, in addition, the first 3% is matched dollar-for-dollar and the next 2% is matched 50 cents on the dollar.  The rule is different for those in uniformed services.

Vesting Schedules

Your own personal contributions to these plans are always vested, meaning they are not subject to being forfeited.  However, employers generally have their own vesting schedules that might differ for their contributions to the plan.  The maximum allowable vesting requirement is 6 years.

One example of a vesting requirement is a cliff vesting schedule where you are fully invested after 3 years of service (which is the case with the Thrift Savings Plan).  Other employers might include something like 0% vesting after 1 year, 25% vesting after 2 years, 50% vesting after 3 years, 75% vesting after 4 years and 100% vesting after 5 years.

If you leave the company before you are 100% vested, you will lose a portion of the contributions that the employer made to your account. However, as was mentioned above you will NOT lose your own retirement contributions.


Although the general rule is that you should plan on NOT pulling out any of the funds that you put into these retirement accounts until you retire at 59 ½ or later, there are a few exceptions.  The allowable distributable events (which vary for different employers and plans) include:

  • Separation from service
  • Retirement age
  • Death
  • Disability
  • Termination of Plan
  • Hardship

The hardship exception encompasses a number of reasons that an employee might qualify for distributions. These include medical expenses, purchasing a principal residence, possible eviction from personal residence, repairs for damage to a personal residence, tuition, and funeral or burial expenses. There are many additional rules related to the hardship withdrawals, so be sure to do your research if you find yourself needing to withdraw retirement funds for these reasons.

In addition, realize that while the penalty won’t apply to these distributions, you’ll still be required to pay ordinary income tax on the funds withdrawn.

457 Plan: The 457 plan allows for early withdrawals without penalty for any reason.  However, you must pay ordinary income tax on the withdrawals.

TSP: The thrift savings plan has a number of different rules for hardship withdrawals including negative monthly cash flow, medical expenses, personal casualty losses and legal expenses for separation or divorce.

When you withdraw funds after retirement age, you will pay ordinary income tax on the full amount that you distribute from these plans. All of the qualified retirement plans require minimum distributions (referred to commonly as RMD) at age 70 ½.


Qualified retirement plans are a great way to save for the future without relying on Social Security.  There are a few other benefits to each of these plans.

401(k) Plan: There are some plans that offer very generous matching and inexpensive fees, as well as financial education to help you succeed in retirement planning.  In addition, it’s common for employers in the private sector to automatically enroll new employees in the retirement plan, with the option to opt-out instead of vice versa.  This encourages participation and sets up employees to succeed. In addition, 401(k) plans often offer the option for employee loans.

403(b) Plan: Unfortunately, 403(b) plans generally have higher fees than 401(k) plans.  They generally have inexpensive investment options though including index funds that otherwise would require a large minimum investment. Most plans also have loan options available.

457 Plan: The 457 plan additional features were discussed above under “contributions”.  They also offer loans.

TSP: The thrift savings plan’s best feature is its extremely low fees.  The government subsidizes the fees using forfeited funds from other participants, so they have by far the lowest fees of all the plans.


Now that we’ve been through a summary of some of the features, benefits and restrictions related to qualified retirement accounts, what we really want to know is how we can build and grow our retirement accounts over time so that we can keep our lifestyles when we are at the golden age that we will no longer be working (sooner or later!).

We’ve already talked about the wonders of compounding interest, so let’s see it in action with our retirement accounts.  The power of compounding is shown in the difference between the “Ending Balance” and “Cumulative Contributions” in the spreadsheet shown below.

I wanted to create a resource that not only shows how contributions to a retirement grow over time, but also how the distributions in retirement years deplete the balance.

To use this spreadsheet, you should start with your retirement budget spreadsheet completed from the previous class RE401: Calculating Retirement Needs. Adjust the inputs here to match and then enter the annual contributions needed in the contribution column for each applicable year. These contributions were determined in that previous class.

Then, start with the retirement year and enter the first year outflow needed based on the budget. Each subsequent year should be increased by the inflation rate (2.5% default in that example). See the example below for the Smith family for an illustration of how this should appear.

If you are more concerned with getting the balance of your retirement account to a certain point, you can ignore the withdrawal portion completely and focus on the contributions only and building it up to your goal balance.

You can also run a variety of scenarios such as the following:

  • A calculation based on your current level of retirement contributions (be sure to include employer contributions as well)
  • A calculation based on increasing your retirement contributions by 1% per year (or another %)
  • A calculation based on contributing the maximum allowed to your retirement account (currently $18,000 but don’t forget to include employer contributions)

You should clearly be able to see from this example how your contributions made now and saved for the future will impact the lifestyle that you are able to live during retirement years.


Jim Smith has a 401(k) plan with his employer, Michigan Real Estate company. He’s not currently contributing to the plan (yikes!), but plans to in the immediate future, starting with the employer match.  His employer will match 50 cents on the dollar for up to 6% of his retirement contributions (basically 3% of his salary).

To keep following the Smith family example from the previous class, you will recall that in order to retire at age 65 the Smith family calculated that they would need to contribute $5,097.65 annually (as shown below).Filling out the retirement spreadsheet for this class results in the following analysis:

You should note that after the final contribution at age 64, the ending balance matches the lump sum we already determined in the previous class of $835,982. However, due to some differences in the method of determining interest rates adjusted for inflation, the balance doesn’t exactly go down to zero by age 95 (but it’s close!).


Your homework assignment is to estimate and plan for future retirement needs using the resources provided in this class.

  • IMPROVING -Use an online calculator from any major brokerage company to estimate future retirement funds available based on set annual or monthly contributions and make a goal to save.
  • INVESTED – Use the spreadsheet to analyze future retirement funds available based on current contributions as well as the impact of varying contributions.  Start saving now and set a concrete retirement contribution goal.
  • UNSTOPPABLE – Use the spreadsheet to analyze retirement contributions as above.  Revise your financial goals to include a set number to set aside each month (or year) to save for future retirement.

What kind of retirement account do you currently contribute to?


2 Responses

  1. I contribute the max in my TSP account. I have to admit that when I first started doing it, seeing that much cash go into the account was exciting and scary at the same time. Now one of the things I’m trying to figure out. Depending on the Republican tax plan, I am curious to see if it will make sense to utilize the roth tsp option that I have available. It’s hard to determine what the future holds but I wonder if tax rates will get much lower.



I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.


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