What is a 414(h) Retirement Plan?

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson you'll learn about a special retirement plan for government employees. You'll learn how monies get deposited into this plan and how it can benefit tax-wise.

A 414(h) Retirement Plan

What do you think of when you think of retirement plans? Do you think of an IRA or a 401(k)? Yes, these are common investment plans available to everybody, but did you know that there are other types of retirement plans? One such retirement plan is called the 414(h) retirement plan. It is this retirement plan that you'll learn about in this lesson. A 414(h) retirement plan is not that much different from a traditional IRA or 401(k) plan. All of these allow you to save money for retirement while providing tax benefits now. The one downside with the 414(h) retirement plan is that these accounts don't qualify for the Retirement Savings Credit.

Teachers working at public schools are government employees who may have the option of a 414(h) retirement plan

Who Is It For?

The biggest difference between a 414(h) retirement plan and a traditional IRA or 401(k) plan is that the 414(h) retirement plan is specifically for government employees. So if you're not a government employee, then you won't have this option. But if you work for a government-run company that offers the 414(h) retirement plan, then you'll have this option.

How They Are Deducted

A 414(h) is considered an employer-sponsored retirement plan similar to a 401(k), so you don't deposit funds like you do to your checking or savings account. Instead, you'll automatically get these funds taken out of your paycheck and sent directly to your 414(h) plan. This means that if you make $3,000 before taxes and your stated contribution to your 414(h) is 4 percent, then $120 ($3,000 * 0.04) is taken out of it along with your taxes. This $120 then goes into your 414(h) plan. So, you technically won't see this money until you retire.

The 414(h) is considered an employer-sponsored plan because your employer will also contribute some funds to your plan. The University of Nebraska, for example, allows its employees to choose between two different contribution levels. The first level has the employer contributing 6.5 percent of the employee's paycheck to the 414(h) plan while the employee contributes 3.5 percent. The second level has the employer contributing 8 percent and the employee 5.5 percent.

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