Photo: The sunset off of the Northern California coast near Redwoods National Park. Photo taken in July of 2011.

This article is a second article in a series discussing the different types of investments that we can use for saving money. The first article discussed the IRA and Roth IRA. This article will focus on the 401k and 403b investment opportunities that are available to employees working at large companies or large non-profits.

The 401k Basics:

$18,000 Contribution Limit ($24,000 for people 50 or older).
Contribution Limit does not apply to Rolling over funds from a previous account.
Contributions are tax deferred (unless placed in a Roth 401).
Contributions are made by employer through payroll deduction.
Tax deferred basically means that the contributions are not taxed today.
Contributions to a 401k effectively lowers your taxable income.
Employers can match an employees contribution.
Money cannot be used until death, disability, or age 59 1/2.
If money is pulled out before 59 1/2, the account holder will be charged taxes at the current tax rate and incur a 10% penalty.
Required Minimum Distributions at the age of 70 1/2.
Accounts can be rolled over to an IRA, when you leave your job.
Money grows tax free (tax-sheltered), until distributions or withdrawals.
Once the money is withdrawn, then you will be taxed at your income level.

The 403b Basics:

Also referred to as the Tax Sheltered Annuity plan (TSA).
Available to employees of tax-exempt organizations, public schools, some ministers, and some hospital organizations.
$18,000 Contribution Limit (up to $21,000 for employees with 15 years or more of service).
$6,000 Catch-up contribution allowed to employees 50 or older ($24,000 to $27,000 possible)
Extra Contributions must be allocated in order (1st: 15-year rule, 2nd: Catch Up)
Contribution Limit does not apply to Rolling over funds from a previous account.
Contributions are tax deferred (unless placed in a Roth 401).
Contributions are made by employer through payroll deduction.
Tax deferred basically means that the contributions are not taxed today.
Contributions to a 401k effectively lowers your taxable income.
Employers can match an employees contribution.
Money cannot be used until death, disability, or age 59 1/2.
If money is pulled out before 59 1/2, the account holder will be charged taxes at the current tax rate and incur a 10% penalty (unless active reservist).
Required Minimum Distributions at the age of 70 1/2.
Accounts can be rolled over to an IRA, when you leave your job.
Money grows tax free (tax-sheltered), until distributions or withdrawals.
Once the money is withdrawn, then you will be taxed at your income level.

The 401k and 403b are both very similar plans. Both are tax deferred and both allow for $18,000 contributions yearly. However, the 403b does allow for extra contributions after 15-years of service. 401k account holders do not have this option. When compared to the IRA or Roth IRA, there is a big benefit with the 401k or 403b that allows you to invest more yearly. Interestingly, my wife and I both work at different jobs that offer different retirement vehicles. My job offers the 403b with a match 0.5% once a year. Oppositely, my wife's jobs offers a 401k with a 5% match.

Our personal investing plan is decided based on the information above. As I mentioned earlier, I suggest investing in a Roth IRA first, unless your employer matches your investing into a 401k. My wife gets a 5% match, so I calculated her investments based off of invest 15% a year into retirement before doing anything else. My wife's investing plan is as follows:

1. 401k (8% + 5% match = 13% of her income total)

2. Roth IRA (7%)

3. House Payments

4. Savings for large purchases

5. College Funds (after birth of child)

6. Brokerage Investments (after the house is paid off).

7. Rental Properties (after the house is paid off).

This plan is basically the same, when compared to my plan with the only difference being the order that we invest in the Roth IRA. We always make sure to invest in my wife's 401k prior to investing in her Roth IRA. Oppositely, we invest in my Roth IRA first and then invest the leftover of 15% of my income in my 403b.