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403(b) vs 401(k)

Posted: Oct 15, 2015 | Author: | Comments: 0

Both 401(k) and 403(b) plans are considered employer-offered, tax-advantaged retirement options. 401(k) and 403(b) plans are similar in some ways. For example, both have the same contribution limits, both offer Roth options and both require participants to reach age 59.5 before money can be withdrawn from the plans. Both 403(b) and 401(k) plans also offer substantial benefits to participants. Employees are able to receive immediate tax savings because every pre-tax dollar contributed reduces their taxable income for the year. Both accounts will also grow tax-deferred, enhancing the power of compound interest.

How is a 403(b) different from a 401(k)?

However, there are some major differences as well. The main difference between the two is typically the type of employer who is sponsoring the plan. For example, 401(k) plans are offered by private, for-profit companies, where 403(b) plans are only available to nonprofit organizations and government employers. This can include schools, religious groups and hospitals. 401(k) plans also tend to be administered by one company. Because these types of employers do not generate a profit, 403(b) accounts are unable to accept profit sharing from the company. The organization also has no ownership of the 403(b) plan. The company’s only legal obligation is to deposit the employee's salary deductions into the account. Because the law allows certain organizations to be exempt from many administrative processes that apply to 401(k) plans by offering 403(b) plans instead, the administrative costs for a 403(b) are lower. This allows organizations with very small budgets to help their employees save for retirement.

403(b) plans typically offer a variety of mutual fund and annuity options (most 403(b) plans offer 30-50 approved vendor options). 403(b) plans also tend to offer a simpler review and certification process. This is because this type of plan is generally exempt from the Employee Retirement Income Security Act (ERISA). The Act requires that other tax-deferred accounts, like 401(k)s, undergo periodic reviews known as "discrimination testing."

Another major difference between the two is employer match. While 403(b) plans can provide employer matches to participant contributions, most employers are unwilling to offer matches because they do not want to lose their ERISA exemption. Also, the employer matches the employees CalSTRS or CalPERS contributions. 401(k) plans, in reverse, tend to offer match programs at a far higher rate becasue the employer typically does not offer a pension plan.

What is The Best Plan To Pick?

Regardless of whether you opt for a 403(b) or 401(k) retirement plan, having a retirement plan is the best way to safeguard your financial future. It is also important to know the ins and outs of your plan and the best approaches to saving for retirement so you can reap the rewards later. If you want to learn more about your retirement savings options, Ed4Ed.org can provide you with the information you need.