Workplace plans: the 401(k), the 403(b), and the TSP, from the first paycheck to the last

What it is

A workplace retirement plan is a box with tax rules on the lid, opened for you by your employer. A 401(k) comes from a private company, a 403(b) from a school, hospital, church, or nonprofit, a 457(b) from a state or local government, and the Thrift Savings Plan, the TSP, from the federal government and the uniformed services. They differ in small ways that matter and agree on the big ones: money goes in from your pay before or after tax, it grows without being taxed year to year, and the rules about getting it back out are strict until you are near retirement.

Two decisions inside the box are yours, and they decide almost everything. How much of your pay goes in. And what you hold once it is in. The employer decides the menu, the match, the fees, and the paperwork, and none of that is in your control, but the two decisions that are yours matter more than all of it.

Getting in

Many employers now enroll you automatically at a small percent of pay, often 3 percent, with the money going into a target date fund unless you say otherwise. Automatic enrollment is better than nothing and worse than a decision. The first thing to do at a new job, in the first month, is to open the plan's website, find the contribution page, and set the percent yourself. If your employer does not enroll you automatically, you have to sign up, usually online, and you can do it any time after your eligibility date, which is often the first day or after a waiting period of up to a year. The date is in the summary plan description, the document every plan must give you if you ask.

You can change your contribution percent whenever you like. Most plans process a change within one or two pay periods. Raising it by one percent at every raise is a habit that outperforms nearly every clever strategy, because you never feel the money leave.

The employer's money

Many employers add money when you do. The formula is in the plan document and it is worth knowing by heart. A common one is 50 cents for every dollar you contribute, up to 6 percent of your pay. On a $52,000 salary that means you contribute $3,120 a year and the employer adds $1,560. Another common formula is a dollar for dollar match on the first 3 percent and half on the next 2, which comes to a 4 percent match for a 5 percent contribution. Some employers make a flat contribution whether you contribute or not; some make none.

The arithmetic that should settle the question of whether to contribute: a 50 percent match is a 50 percent return on the day the money lands, before any investment does anything. A 100 percent match is a 100 percent return. Nothing on the menu, nothing on any market, reliably does that. The first dollars you save should go here, up to the full match, before an IRA, before a taxable account, before paying down any debt below roughly 7 percent interest. The only thing that comes before it is a small cash cushion so a flat tire does not become a credit card balance.

The employer's money may not be entirely yours yet. Vesting is the schedule on which it becomes yours if you leave. Your own contributions are always 100 percent yours from the first day. Employer money can vest all at once after a period, called cliff vesting, which the law caps at three years, or gradually, called graded vesting, which the law requires to reach 100 percent within six years. A plan might vest 20 percent a year starting in year two. If you leave before you are fully vested, the unvested part goes back to the plan. The schedule is in the summary plan description. If you are thinking about leaving a job, look at the schedule first; a vesting date a few months away can be worth thousands.

The TSP works differently and better. Federal employees under FERS get an automatic 1 percent of pay from the agency whether they contribute or not, plus a match of the first 3 percent of pay dollar for dollar and the next 2 percent at half. Contribute 5 percent and the government adds 5 percent. The automatic 1 percent vests after three years for most employees; the match vests immediately. Service members under the Blended Retirement System get a similar structure after their first two years of service. If you are a federal employee or service member contributing less than 5 percent, you are declining free money every pay period.

The limits, and why this guide does not print them

There is a yearly limit on what you can put in from your own pay, and a larger limit on the total of your money plus the employer's. People 50 and older can add a catch up amount on top, and recent law added a larger catch up for people in their early sixties. Every one of these figures is adjusted most years for inflation. Any number printed on a web page is wrong within a year, so this guide does not print them; the IRS page on contribution limits, linked at the bottom, has the current figures, and the plan's website will stop you at the limit anyway. What matters is the shape: your own contributions are capped, the employer's are counted separately, and older workers may put in more.

One trap worth knowing: if you change jobs mid year and contribute to two plans, the yearly limit on your own contributions applies across both, and it is your job to track it, not the employers'. Going over means a correction and a tax headache. The second plan does not know what you put in the first.

Traditional or Roth inside the plan

Most plans now offer both. Traditional contributions come out of your pay before income tax, which lowers this year's taxable income; you pay income tax on the money and everything it grew into when you take it out. Roth contributions come out after tax; you pay nothing later, on the money or the growth. The employer's match usually goes into the traditional side regardless of which you choose, though recent law allows employers to offer a Roth match.

The two jars guide on this site walks the decision in full. The short version: if you expect a higher tax rate in retirement than today, Roth. If lower, traditional. If you do not know, and nobody does, split. A young person early in a career, in a low bracket, with decades of growth ahead, leans Roth. A person in peak earning years leans traditional. Unlike a Roth IRA, a Roth 401(k) has no income limit, so high earners who cannot use a Roth IRA can use this one.

What to hold inside it

The plan gives you a menu, usually a dozen to thirty funds. The menu decides what is possible; your choice decides what happens. Three questions sort any menu.

First, what does each fund hold? A fund's name is a hint, not a promise. A target date fund holds a mix of stocks and bonds that shifts toward bonds as the year in its name approaches; it is the sensible default for someone who does not want to think about it, and it is what automatic enrollment usually picks. An index fund copies a published list, like the 500 largest US companies or the whole US stock market, and changes only when the list does. A stable value or money market fund holds cash equivalents and barely grows. Actively managed funds pay people to pick, and charge for it.

Second, what does each fund cost? The expense ratio is a yearly percent taken out of the fund's returns before you see them. On a typical menu it ranges from a few hundredths of a percent for an index fund to around 1 percent for a managed one. That range is the whole game over a career: 1 percent a year on a 7 percent return, for thirty years, takes about a quarter of the ending balance. The fee tool on this site turns any two fees into dollars.

Third, how much do you want in stocks? Stocks grow more and fall harder. Bonds grow less and fall less. The mix that fits you depends on when you need the money and how you would behave in a 30 percent drop; the rehearsal on this site lets you find out before it happens. A common starting point for someone decades from retirement is mostly stocks; a common point near retirement is a blend. A target date fund makes that choice for you and adjusts it over time.

For most people the answer that survives every check is this: the cheapest broad stock index fund on the menu, paired with a bond index fund in whatever proportion fits your horizon, or the target date fund nearest your retirement year if you would rather not maintain a mix. Choose something else only if you can say in a sentence why it is better after fees.

The TSP menu is five index funds and a set of lifecycle funds. G is government securities that cannot lose value and earn a modest rate. F is bonds. C is the 500 largest US companies. S is smaller US companies. I is international. The L funds are mixes by target year. All of them cost a tiny fraction of what most private plans charge. The most common TSP mistake is leaving everything in G for decades out of caution, which is safe from a bad year and certain to lose to inflation over a career.

Fees you do not see on the fund

Beyond fund fees, a plan can charge administrative fees, sometimes flat and sometimes a percent, and some plans wrap an adviser's fee over the whole account. Each is small alone. Together, an all in cost of 1.5 percent is not unusual in small company plans, and at 1.5 percent for thirty years more than a third of the ending balance is gone. The plan must disclose these fees every year in a document that most people throw away. Read it once, or paste it into the paperwork reader.

If the plan is expensive and the menu is poor, the sensible order changes: contribute up to the full match, then fund an IRA at a low cost brokerage where you can hold what you want, then come back to the plan for anything beyond the IRA limit. A bad plan is still worth the match. It is not worth more than the match if better boxes are open to you.

Reaching the money early

The box is meant to stay closed until retirement, and the rules enforce it. Money taken out before age 59 and a half is taxed as income and, in most cases, charged a 10 percent penalty on top. The exceptions are listed on the IRS page linked below and include separation from service in or after the year you turn 55, certain medical expenses, disability, and a series of substantially equal payments. The age 55 exception is worth remembering: it applies to the plan of the employer you just left, not to an IRA, so rolling that plan into an IRA at 56 would close a door that was open.

Some plans allow loans, usually up to half the vested balance with a cap, repaid through payroll with interest you pay to yourself. A loan is not taxed if repaid on schedule. The danger is leaving the job with a loan outstanding: the unpaid balance usually becomes a distribution, taxed and penalized, on a short deadline. Some plans allow hardship withdrawals for specific needs; those are taxed and usually penalized, and they cannot be paid back.

A rule that catches people from the other direction: after a certain age, currently in your early seventies, the law requires you to start taking money out of traditional accounts each year, called required minimum distributions, and taxes it as income. Roth 401(k) balances were recently freed from this rule during the owner's life, matching Roth IRAs. The age has moved twice in recent years, so check the IRS page rather than a memory.

Leaving a job

When you leave, you have four choices, and the order of preference is nearly always the same.

Leaving it where it is. Allowed if the balance is above a threshold the plan sets, often a few thousand dollars. Nothing changes; you just cannot contribute. Fine for a good, cheap plan, especially if you left in or after the year you turned 55 and might want the money before 59 and a half.

Rolling it into the new employer's plan. Keeps everything in one place and keeps the age 55 door open at the new employer. Only sensible if the new plan is at least as good and cheap.

Rolling it into an IRA. Opens the whole market of investments at a low cost brokerage, usually cheaper than any plan. Closes the age 55 door. Complicates a backdoor Roth if you ever plan one, because a large traditional IRA balance changes the tax on that maneuver.

Cashing it out. Taxed as income, penalized if under 59 and a half, and gone. This is the choice a large share of people under 30 make when they leave a job, and it is the single most expensive routine mistake in retirement saving. A $10,000 balance cashed out at 28 is roughly $100,000 missing at 65 at a 7 percent return.

How you roll matters as much as where. Ask for a direct rollover, where the old plan sends the money straight to the new plan or IRA, or writes a check made out to the new custodian. If instead they send you a check in your name, the law requires them to withhold 20 percent for taxes, and you have 60 days to deposit the full original amount into the new account, including the 20 percent you did not receive, or the shortfall is treated as a distribution. Direct rollover avoids the whole problem. Say those two words to the plan administrator and let them handle it.

Federal employees leaving service can leave money in the TSP, which many keep for its costs, or roll it out; money can also be rolled into the TSP from other plans. Service members who separate keep their TSP accounts.

A worked example, year by year

Maya starts a job at 25 earning $52,000, and her pay rises about 2.7 percent a year. Her employer matches half of the first 6 percent. She sets her contribution to 6 percent and raises it one percent at each yearly raise until it reaches 12 percent, which happens at 31. She chooses the plan's total stock market index fund at 0.04 percent and leaves it there. Assume a 7 percent average return, an example near the long run stock average and not a promise. At 35 she has about $101,000, of which roughly $24,000 came from the employer. At 45, about $356,000. At 65, never having contributed more than 12 percent of pay, about $2 million in that year's dollars, which buys what roughly $627,000 buys today at 3 percent inflation. The contributions tool on this site lets you replace every one of those numbers with your own.

Now the same Maya, except at 35 she cashes out the $101,000 to help with a house. After income tax and the 10 percent penalty she keeps perhaps $70,000, and her retirement account starts again from zero while she keeps the same 12 percent habit. At 65 she has about $1.28 million instead of $2 million. The house was not free. It cost about $770,000 of future money, and no one ever handed her that bill.

The mistakes, in the order they happen

Not enrolling, because the form was confusing or the waiting period passed unnoticed. Contributing less than the match. Leaving automatic enrollment at 3 percent for a decade. Leaving everything in the default cash or stable value fund because it felt safe. Picking a fund because it did well last year. Holding company stock in the plan because it was offered, so that a bad year for the employer is a bad year for the paycheck and the retirement at once. Never reading the fee disclosure. Taking a loan and then changing jobs with it outstanding. Cashing out at a job change. Rolling into an IRA at 56 without knowing about the age 55 rule. Contributing to two plans in one year without tracking the combined limit. Forgetting the account entirely at an old employer; the Department of Labor now runs a lost and found for exactly this.

Questions to answer before you leave this page

What is your plan's match formula, exactly, and are you contributing enough to get all of it? What is the vesting schedule, and what date are you fully vested? What fund are you actually in right now, and what does it charge per year? What are the plan's administrative fees beyond the funds? Is there a Roth option, and have you chosen traditional, Roth, or a split on purpose? What is your plan's rule on loans and on leaving with a loan outstanding? And when you leave this employer, which of the four choices will you make, and have you written down the words direct rollover?

If you cannot answer the first one, the paperwork reader on this site will find it in your plan document in under a minute. That is the first mission on your road.