403b plans and 401k plans are actually quite similar. The main difference between the two plans is the type of employer offering the plans. 401(k) plans are used by private and “for-profit” businesses. But a 403(b) plan is offered by nonprofit and tax-exempt organizations.
But aside from the similarities, there are some key differences. Let’s take a close look at the plans.
What is a 403b?
A 403(b) is a retirement structure designed for employees of tax-exempt organizations, such as schools, hospitals, and non-profit organizations. It is also known as a tax-sheltered annuity (TSA) plan. The main purpose of a 403(b) plan is to help employees save for their retirement years. Contributions to the plan are pre-tax, which means that they are deducted from the employee’s gross income before taxes are calculated. This will result in a reduction in the employee’s taxable income and a lower tax bill.
The funds in a 403(b) plan are invested in various investment options, including mutual funds, annuities, and insurance contracts. Employees can choose the investments that they want to invest in based on their risk tolerance, investment goals, and time horizon. Some 403(b) plans may offer investment advice and guidance to help employees make informed investment decisions.
Like other retirement plans, rules and regulations govern contributions and withdrawals from a 403(b) plan. Generally, employees can contribute up to a certain amount each year, and withdrawals before age 59 1/2 may be subject to taxes and penalties. Employers may also offer matching contributions to encourage employees to save for retirement.
What is a 401k plan?
A 401(k) plan is a retirement strategy that many employers offer to their employees. It is named after the section of the Internal Revenue Code that governs it. A 401(k) plan aims to help employees save for their retirement years.
Plan contributions are funded pre-tax, which means they are deducted from the employee’s gross income before taxes are calculated. This may result in a reduction in the employee’s taxable income and a lower tax bill.
The 401(k) plan funds are invested in various investment options, including stocks, mutual funds, and bonds. Employees can choose the investments that they want to invest in based on their risk tolerance, investment goals, and time horizon. Some 401(k) plans may offer investment advice and guidance to help employees make informed investment decisions.
Like other retirement plans, some rules and regulations govern the contributions and withdrawals from a 401(k) plan. Generally, employees can contribute up to a certain amount each year, and withdrawals before age 59 1/2 may be subject to taxes and penalties.
Employers may also offer matching contributions to encourage employees to save for retirement. 401(k) plans have become a popular way for Americans to save for retirement, with millions of workers participating.
Unique Differences Between 403(b) & 401(k) and Plans
403(b) and 401(k) plans have a lot of similarities, but there are some critical differences:
- Eligibility: 401(k) plans are established by for-profit businesses, while 403(b) plans are administered by tax-exempt organizations, such as schools, hospitals, colleges and universities, religious organizations, and other nonprofit entities.
- Employer match: Both plans allow employer matching, but fewer entities offer matches with 403(b) plans. Suppose an employer who provides a 403(b) does offer a match. In that case, they have to comply with regulations created by ERISA. Most entities want to avoid ERISA regulations because of the added cost and contribution requirements.
- Investment options: 401(k) plans offer mutual funds, annuities, stocks, and bonds, while 403(b) plans only have access to mutual funds and annuities. 401(k) plans usually provide a broader range and sometimes better investment options.
- Cost: 403(b) plans typically come with lower administrative fees because the IRS wants to keep nonprofit organizations manageable. 401(k) plans are more costly for employers to maintain.
- Additional contributions: Certain 403(b) plans will allow participants who have worked over 15 years with the same entity to contribute an additional $3,000 annually up to a $ 15,000-lifetime limit.
| Plan Type | 401(k) | 403(b) |
|---|---|---|
| Employer Eligibility | Employees of “for-profit” businesses. | Employees of “tax-exempt” and nonprofit entities. |
| Investment Choices | Stocks, bonds, mutual funds, and annuities. | Limited to mutual funds and annuities |
| Fees/Cost | Higher employer administrative fees. | Lower employer maintenance fees. |
| Company Match | Yes | Allowed, but less common. |
| Additional Contributions | Allows catch-up contributions at age 50+. | Allows additional $3,000 after 15 years. Catch-up contributions at age 50+. |
