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What’s the Difference Between 401(k) and 403(b) Retirement Plans?

Investing in your retirement early is the best way to ensure financial stability as you age, especially when it comes to understanding various retirement options. Getting started may feel overwhelming — luckily we’re here to help. We help break down the difference between 401(k) and 403(b) accounts, and how they can impact your financial life.

You may already know the value in adjusting your budget to make saving for a rainy day a priority. But are you also prioritizing your retirement savings? If you’re just getting started in the workforce and looking for ways to invest in yourself, 401(k) and 403(b) plans are great options to know about. And, the main difference between a 401(k) and a 403(b) is the company who’s offering them.

401(k) accounts are offered by for-profit companies and 403(b) accounts are offered by nonprofit, scientific, religious, research, or university companies. To understand the similarities and differences between plans in depth, skip to the sections below or keep reading for an in-depth explanation.

How a 401(k) Works
How a 403(b) Works
The Difference Between 401(k) and 403(b)
The Similarities Between 401(k) and 403(b)
5 Ways to Grow Your Retirement Savings
What is a 401(k) and 403(b)

How a 401(k) Works

A 401(k) is a retirement account set up by for-profit employers for employees to contribute before-tax earnings. Employer-sponsored 401(k) accounts give employees the opportunity to build retirement savings in different forms — including company stocks, before-tax earnings, and exchange-traded funds (ETFs).

Each company’s retirement plans may vary on benefits like employee matching, stock options, and more. In addition, you’re able to choose how much you’d like to contribute on a monthly basis. Keep in mind, both 401(k) and 403(b) plans have a yearly limit of $19,500 with your employer matches. Plus, most retirement funds have required minimum distributions (RMDs) by the time you turn 70. This essentially means you have to take a minimum amount of money out each month whether you want to or not.

In most cases, employers will offer 401(k) matching to encourage consistent contributions. For example, your employer match may be 50 cents of every dollar you contribute up to six percent of your salary. For example, with this employer match on a $40,000 salary, you would contribute $200 and your employer would contribute an additional $100 each month. This pattern would continue until your annual contributions hit $2,400 and your employer contributes $1,200.

Employee matching is essentially free money. You’re monetarily rewarded for your retirement payments. Be sure to pay attention to vesting periods when setting up your employer match. Vesting periods are an agreed amount of time you need to work at a company before you receive your 401(k) benefits. For example, some companies may require you to work for their team for a year before earning retirement benefits. Other employers may offer retirement benefits starting the day you start working with them.

How a 403(b) Works

A 403(b) is a retirement account made by employers for tax-exempt, charitable nonprofit, scientific, religious, research, or university employees. Organizations that qualify for 403(b) accounts include school boards, public schools, churches, hospitals, and more. This type of account is also known as a tax-sheltered annuity plan — they allow pre-tax income to be invested until taken out.

Employers that offer 403(b) retirement plans may offer a pool of provider options that undergo nondiscrimination testing. This allows employers that qualify for this account to shop around for plans that offer the best benefits and don’t discriminate in favor of highly compensated employees (HCEs). For instance, some 403(b) accounts may charge more administrative fees than others.

Employers are able to offer employee matching on 403(b) accounts if they decide to. To cut costs for nonprofit companies, 403(b) retirement plans generally cost less than 401(k) accounts. Costs associated with starting up these accounts may not affect you, but it may affect your employer.

Account Type 401(k) 403(b)
Yearly Contribution Limit $19,500 $19,500
Employer-Issued Packages For-profit employers:
Corporations, private establishments, etc. and sole proprietors
Non-profit, scientific, religious, research, or university employers:
School boards, public schools, hospitals, etc.
Minimum Withdrawal Age 59.5 years old 59.5 years old
Early Withdrawal Fees 10% penalty, tax, and additional fees may vary 10% penalty, tax, and additional fees may vary
Source: IRS.org

The Differences Between 401(k) and 403(b)

Both a 401(k) and 403(b) are similar in the way they operate, but they do have a few differences. Here are the biggest contrasts to be aware of:

  • Eligibility: 401(k) retirement plans are issued by for-profit employers and the self employed, 403(b) retirement plans are for tax-exempt, non-profit, scientific, religious, research, or university employees. As well as Hospitals and Charities.
  • Investment options: 401(k)s offer more investment opportunities than 403(b)s. 401(k) accounts may include mutual funds, annuities, stocks, and bonds, while 403(b) accounts only offer annuities and mutual funds. Each employer varies in retirement benefits — reach out to a trusted financial advisor if you have questions about your account.
  • Employer expenses: 401(k) accounts are generally more expensive than 403(b) accounts. For-profit 401(k) accounts may pay sales charges, management fees, recordkeeping, and other additional expenses. 403(b) plans may have lower administrative costs to avoid adding a burden for non-profit establishments. These costs vary depending on the employer.
  • Nondiscrimination testing: This form of testing ensures that 403(b) retirement plans are not offered in favor of highly compensated employees (HCEs). However, 401(k) plans do not require this test.

The Similarities Between 401(k) and 403(b)

Aside from their differences, both accounts are set up to aid employees in retirement savings. Here’s how:

  • Contribution limits: Both accounts cap your annual contributions at $19,500. In the event you contribute over this limit, your earnings will be distributed back to you by April 15th. If you’re under your retirement contributions by the time you’re 50 years old, you’re allowed to make catch-up contributions. This means that, if you’re eligible, you can contribute $6,500 more than the yearly contribution limit.
  • Withdrawal eligibility: You must be at least 59.5 years old before withdrawing your retirement savings. In the case of an emergency, you may be eligible for early withdrawal. However, you may be charged penalties, taxes, and fees for doing so.
  • Employer matching: Both retirement account options allow employers to match your contributions, but are not required to. When starting your retirement fund, ask your HR representative about potential benefits and employer matching.
  • Early withdrawal penalties: If you choose to withdraw your retirement savings early, you may be penalized. In most cases, you need a valid reason to withdraw your funds early. Eligible reasons may include outstanding debt, bankruptcy, foreclosure, or medical bills. In addition, you may be charged a 10 percent penalty fee, taxes, and other fees. During a downturned economy, as we’ve seen with the COVID-19 pandemic, fees may be waived.

5 Ways to Grow Your Retirement Savings

5 Ways to Grow Your Retirement Savings

Contributing to a 401(k) or 403(b) can help grow your investments at a reduced risk. You’re able to grow your non-taxed income to put towards your future goals. The more you contribute, the more you may have by the time you retire. Here are a few tips to get ahead of the game and invest in your financial future.

1. Create a Retirement Account Early

It’s never too late to start a retirement account. If you’re currently employed, but haven’t set up your retirement account, reach out to your HR representative. Ask about retirement plan options and their benefits. When employers offer retirement matches, consider contributing as much as you can to meet their match.

2. Set up Monthly Automatic Contributions

Save time and energy by setting up automatic contributions. You may feel less interested in contributing to your retirement as your payday approaches. Taking time to set up a retirement fund and budgeting for this change may be holding you back. To meet your retirement goals, consider setting up automatic payments through your employer. After a while, you may not even notice the slight budget adjustment.

3. Leverage Employer Matching

Employer matching is essentially free money. Employers may put money towards your future for nothing but your own contribution. This encourages employees to consistently put money towards their retirement savings. Not only are you able to earn extra money each month, but this “free money” will grow with interest over time. If you can, match your employer’s contribution percentage, if not more.

4. Avoid Early Withdrawal

Credit card balances, student loans, and mortgages can be stressful. Instead of withdrawing early from your retirement fund to pay for these, consider other debt payoff methods. If you’re eligible to withdraw from your retirement early, you may face penalty fees, taxes, and administrative expenses. This may hinder your savings potential or push back your desired retirement date.

5. Contribute Your Future Raises and Bonuses

If you’re saving less than $19,500 to your retirement fund this year, consider contributing more. If you earn a bonus or a raise, stick to your current budget and consider increasing your contributions. Ask your employer to increase your retirement payments right before you receive a bonus or raise. The more you contribute, the more interest you’ll accrue over time.

Whether your retirement funds are established through a 401(k) or a 403(b), these accounts offer you the chance to build your financial portfolio. Consistently funding your retirement account may better your financial plan and set you at ease. As your contributions age, so do your interest earnings. You’ll be able to make money on your pre-taxed income and set your future self up for success. Get started by checking in on your budget and carving out a specific amount to put towards your retirement each month.

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Source: mint.intuit.com

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A Debt Consolidation Loan Will Not Fix Your Bad Money Habits

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If you have a lot of debt or different types of debt, then a debt consolidation loan might sound like a good idea. However, if you have low credit, you may not have many options.

The good news is, you can still get a debt consolidation loan, even with bad credit. In this article, you will learn about the ins and outs of a debt consolidation loan, the pros and cons of getting one, and what your alternatives are if you aren’t ready to get a debt consolidation loan.

In This Article

What is a Debt Consolidation Loan?

A debt consolidation loan is a new loan that you take out to cover the balance of your other loans. A debt consolidation loan is a single, larger piece of debt, usually with better payoff terms than your original, smaller debts. When you receive a consolidation loan, your other loan balances are paid off. This allows you to make one monthly payment rather than multiple.

For example, if you had one student loan for each semester of your four-year college degree, then you’d have taken out eight loans. This can be cumbersome to manage, so you could take out a debt consolidation loan to pay off all your eight loans and only make one monthly payment instead.

Get A Debt Consolidation Loan with Bad or Average Credit

If you have poor or average credit, then it might be difficult for you to get approved for a consolidation loan or to get a loan with favorable terms. A bad or average credit score is typically anything under 670. You will need to take steps to get a debt consolidation loan for bad credit.

Step 1: Understand Your Credit Score

The first step toward getting a personal loan or a consolidation loan is to understand your financial standing. Your credit score is one of the main factors that a lender will evaluate when deciding to give you a debt consolidation loan. Therefore, take the time to look up your credit score and what events have caused your score. Sometimes, years of bad habits contribute to a low score.

Continue to monitor your score over time. You can learn what contributes to a good score as well as what causes your score to decline, and act accordingly.

Step 2: Shop Around for a Debt Consolidation Loan

If you have a poor credit score, you might be inclined to take the first loan offered to you. However, you may have multiple options for lenders to work with, so be sure to shop around for a good interest rate and term. You might want to investigate online lenders as well as brick and mortar lenders such as your local credit union.

Be sure to carefully review all the fees associated with taking out a personal loan. This might include an origination fee or a penalty for paying back your loan early. Understanding your fees can save you hundreds of dollars over the life of your loan.

Step 3: Consider a Secured Loan

Most personal loans used for debt consolidation are unsecured loans. This means that they do not require collateral. However, if you’re having a tough time getting approved for a loan, you might want to consider a secured loan.

Forms of collateral include a vehicle, home, or another asset. The collateral must be worth the amount of the loan if you default on the loan. Even if you can qualify for an unsecured loan, you may want to compare the interest rates of a secured loan to see if you can get a better rate.

Step 4: Improve Your Credit Score

Finally, if you can’t get a loan right away, you may want to take some time to evaluate your credit score and see where your areas of opportunity lie. If you have small glitches on your score that caused it to decrease significantly, then you might be able to raise your score quickly.

For example, one missed payment or forgotten bill can cause your score to plummet. If this is the case, you may be able to pay off that small bill and raise your credit score quickly.

How to Qualify for a Debt Consolidation Loan

To get a debt consolidation loan, you must be 18 years or older and a legal U.S. resident. You must also have a bank account and not be in bankruptcy or foreclosure. These are the basics of qualifying for a debt consolidation loan.

In addition to these basics, you’ll want to try to improve your financial standing as much as possible. Borrowers with good or excellent credit and a low debt-to-income ratio typically have no problem getting a debt consolidation loan. However, if you have bad credit, you will want to work to improve your credit score and decrease your debt-to-income ratio.

If you have bad credit and are considering a debt consolidation loan, you might already be in a financial rut. This can make it difficult to improve your financial standing. If this is the case, you can search for lenders that specialize in helping people with bad or average credit and be sure to shop around for the best rates and terms that you can get.

Personal Loans for Debt Consolidation

If you have poor credit and need a personal loan, you may want to check out these providers. They will offer high-interest loans to people with poor credit.

Fiona

Fiona is an online marketplace that connects potential borrowers with multiple lenders. Borrowers simply fill out a quick application, and they are matched with the lenders most likely to approve them. This saves time and money, as you can be matched with a lender without needing to visit a bunch of sites.

Fiona is ideal for borrowers with a 580 credit score or higher, and that doesn’t want to have to waste time filling out a bunch of applications. A nice feature of Fiona is their initial application requires just a soft credit check, so making a quick application won’t hurt your credit score.

Since Fiona is a marketplace and not a direct lender, the terms of offers and the number of offers borrowers receive may vary. Some borrowers report being bombarded with offers, which we feel is potentially a benefit as multiple offers help ensure you get the best deal.

LendingPoint

Lending Point will typically lend up to $25,000 with an interest rate of 15.89% to 35.99% APR and a 36-month term. You can check your rate for free on their website. If you qualify, you can receive your personal loan in as little as 24 hours. LendingPoint takes your credit score, job history, and income into consideration when you apply for a loan.

SoFi

SoFi will lend up to $100,000 with an interest rate of up to 17% on a 24-month term. There are no origination fees or early payment penalties and no overdraft fees. You can apply online for free and will typically receive your funds in a few days.

Upstart

Upstart will lend up to $50,000 with an interest rate of 7% to 35.99% on a 36 or 60-month term. Funds are provided as early as the day after approval, but they have a high origination fee of 8%.

OneMain Financial

OneMain will lend up to $20,000 with an interest rate of between 18% and 35.99% on a 24 to 60-month term. They do have small origination fees and late payment fees, but they typically range up to $30 per payment. You can apply for a loan online and have it funded as early as a day after you apply. The company also has almost 1,500 branches across the country for those who prefer to apply for a loan in-person.

Should I Get A Debt Consolidation Loan?

If you’re in a pinch and need to consolidate your loans to make them more manageable, then your best option may be to get a personal loan or a debt consolidation loan.

Pros

There are plenty of benefits of a debt consolidation loan. Some of them are:

  • Simplified finances. When you consolidate your debt, you will pay off multiple debts and only have one loan. This means you’ll make one monthly payment instead of multiple to keep track of.
  • Lower interest rates. If you have a bunch of credit cards or other high-interest debt, the interest rates might vary and be high. Personal loans typically have lower interest rates depending on your credit score, the loan amount, and term length.
  • Fixed repayment schedule. Instead of having multiple payments each month that vary by amount, interest rate, and term, you will have a fixed schedule each month.
  • Boost your credit. By eliminating the risk of forgetting to make payments or letting your loans get away from you, paying a set amount on a consolidated loan can help you to boost your credit score.

Cons

Debt consolidation isn’t for everyone. Be sure that you understand the risks you take on as well. Some of the things to watch out for include:

  • You need to change your behavior with money. A debt consolidation loan won’t fix your bad habits with money. Often taking out a consolidation loan leads to more debt, because many people don’t fix the underlying overspending behaviors, or start a cash saving for emergencies. Not fixing your money behaviors leads to that same old cycle and could cause you to take on more new debt.
  • Upfront costs. Some personal loans have upfront fees, including an origination fee, closing costs, or annual fees. If you pay a lot of fees over time, it might not be beneficial to consolidate your loans.
  • Higher interest rates. If you have poor credit, you will not get a favorable interest rate on your consolidated loan. Therefore, you may have a higher interest rate on your consolidated loan than on your existing loans. If this is the case, it likely will not make sense to consolidate.

The Bottom Line

Having poor credit does not mean that you can’t get a debt consolidation loan. However, it might be more difficult for you to get a loan right away or to get one at a favorable rate. If you decide to apply for a debt consolidation loan, be sure to shop around for the best rates and do your best to improve your credit.

This post originally appeared on Your Money Geek

   

Source: debtdiscipline.com

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Is Your Mortgage Forbearance Ending Soon? What To Do Next

Millions of Americans struggling to make their monthly mortgage payments because of COVID-19 have received relief through the Coronavirus Aid, Relief, and Economic Security Act.

But mortgage forbearance is only temporary, and set to expire soon, leaving many homeowners who are still struggling perplexed on what to do next.

Enacted in March, the CARES Act initially granted a 180-day forbearance, or pause in payments, to homeowners with mortgages backed by the federal government or a government-sponsored enterprise such as Fannie Mae or Freddie Mac. Furthermore, some private lenders also granted mortgage forbearance of 90 days or more to financially distressed homeowners.

According to the Mortgage Bankers Association, 8.39% of loans were in forbearance as of June 28, representing an estimated 4.2 million homeowners nationwide.

So what are affected homeowners to do when the forbearance goes away? You have options, so it’s well worth contacting your lender to explore what’s best for you.

“If you know you’re going to be unable to meet the terms of your forbearance agreement at its maturity, you should call your loan servicer immediately and see what options they may be able to offer to you,” says Abel Carrasco, mortgage loan originator at Motto Mortgage Advisors in St. Petersburg, FL.

Exactly what’s available depends on the fine print in the terms of your mortgage forbearance agreement. Here’s an overview of some possible avenues to explore if you still can’t pay your mortgage after the forbearance period ends.

Extend your mortgage forbearance

One simple option is to contact your lender to request an extension.

Homeowners granted forbearance under the CARES Act can request a 180-day extension, giving them a total of 360 days of forbearance, according to the Consumer Financial Protection Bureau.

The key is to contact your lender well before your forbearance expires. If you let it expire without an extension, your lender could impose penalties.

“If you just stop making regular, scheduled payments, you could have a late mortgage payment on your credit,” warns Carrasco. “That could severely impact refinancing or purchasing another property in the immediate future and potentially subject you to foreclosure.”

Keep in mind, though, a forbearance simply delays payments, meaning they’ll still need to be made in the future. It doesn’t mean payments are forgiven.

Refinance to lower your mortgage payment

Mortgage interest rates are at all-time lows, hovering around 3%. So if you can swing it, this may be a great time to refinance your home, says Tendayi Kapfidze, chief economist at LendingTree.

Refinancing could come with some hefty fees, however, ranging from 2% to 6% of your loan amount. But it could be worth it.

A lower interest rate will likely lower your monthly payment and save you thousands over the life of your mortgage. Dropping your interest rate from 4.125% to 3% could save more than $40,000 over 30 years, for example, according to the Consumer Financial Protection Bureau.

“Lenders have tightened standards, though, so you will need to show that you are a good candidate for refinancing,” Kapfidze says. You’ll need a good credit score of 620 or higher.

As long as you’ve kept up your end of the forbearance terms, having a mortgage forbearance shouldn’t affect your credit score, or your ability to refinance or qualify for another mortgage.

Ask for a loan modification

Many lenders are offering an assortment of programs to help homeowners under hardship because of the pandemic, says Christopher Sailus, vice president and mortgage product manager at WaFd Bank.

“Lenders quickly recognized the severity of the economic situation due to the pandemic, and put programs into place to defer payments or help reduce them,” he says.

A loan modification is one such option. This enables homeowners at risk of default to change the terms of their original mortgage—such as payment amount, interest rate, or length of the loan—to reduce monthly payments and clear up any delinquencies.

Loan modifications may affect your credit score, but not as much as a foreclosure. Some lenders charge fees for loan modifications, but others, like WaFd, provide them at no cost.

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Watch: 5 Things to Know About Selling a Home Amid the Pandemic

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Put your home on the market

It may seem like a strange time to sell your home, with COVID-19 cases growing, unemployment rising, and the economy on shaky ground. But, it’s actually a great time to sell a house.

Pending home sales jumped 44.3% in May, according to the National Association of Realtors®’ Pending Home Sales Index, the largest month-over-month growth since the index began in 2001.

Home inventory remains low, and buyer demand is up with many hoping to jump on the low interest rates. Prices are up, too. The national median home price increased 7.7% in the first quarter of 2020, to $274,600, according to NAR.

So if you can no longer afford your home and have plenty of equity built up, listing your home may be a smart move. (Home equity is the market value of your home minus how much you still owe on your mortgage.)

Consider foreclosure as a last resort

Foreclosure may be the only option for many homeowners, especially if you fall too behind on your mortgage payments and can’t afford to sell or refinance. In May, more than 7% of mortgages were delinquent, a 20% increase from April, according to mortgage data and analytics firm Black Knight.

“When to begin a foreclosure process will vary from lender to lender and client to client,” Sailus says. “Current and future state and federal legislation, statutes, or regulations will impact the process, as will the individual homeowner’s situation and their ability to repay.”

Foreclosures won’t begin until after a forbearance period ends, he adds.

The CARES Act prohibited lenders from foreclosing on mortgages backed by the government or government-sponsored enterprise until at least Aug. 31. Several states, including California and Connecticut, also issued temporary foreclosure moratoriums and stays.

Once these grace periods (and forbearance timelines) end, and homeowners miss payments, they could face foreclosure, Carrasco says. When a loan is flagged as being in foreclosure, the balance is due and legal fees accumulate, requiring homeowners to pay off the loan (usually by selling) and vacating the property.

“Absent participation in an agreed-upon forbearance, deferment, repayment plan, or loan modification, loan servicers historically may begin the foreclosure process after as few as three months of missed mortgage payments,” he explains. “This is unfortunately often the point of no return.”

For more smart financial news and advice, head over to MarketWatch.

Source: realtor.com

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