What is the Difference Between a 401(K) Plan and a 403(B) Plan?

September 11, 2020

The abundance of retirement plans available can often leave you a little winded. Two of the major plans are 401(k)s and 403(b)s.  Both are great plans in their own right. They are similar in many ways, but there is one key difference. In this article, we will discuss what distinguishes 401(k)s from 403(b) plans.

Straight off the bat, the major difference between 401(k)s and 403(b) plans is that 403(b) plans are only offered to the workers of not-for-profit or some tax-exempt organizations. The employees of schools, other educational institutions and hospitals are usually eligible for a 403(b) retirement plan. On the other hands, the employees of businesses that operate for profit are usually offered 401(k) plans.

 

401(k) Explained

This retirement plan bears the name of the tax code by which it is governed. 401(k)s are employer-sponsored. They offer great tax advantages to contributors. A 401(k) plan is funded by deductions from an employee’s paycheck.

One of the most outstanding perks of 401(k)s is that employers usually match a portion of their employee’s contribution.

You have full autonomy over the amount that you will contribute on a monthly basis; however, it is advised that you contribute the maximum amount that your employer is willing to match. When you do this, you will benefit from “free money” from your employer.

When you contribute to a 401(k) plan your funds go to an account and not directly to investments. You then have to determine which investments you want your funds to be placed in. The options typically include company stock, ETFs, cash alternatives and others. Investment options will defer by company.

 

403(b) Explained

403(b) plans also bear the name of the tax code that gave birth to the retirement scheme. As mentioned before, this plan is similar to a 401(k) plan. This holds true even though 403(b)s are often offered as annuity contracts or mutual fund custodial accounts. Another name for a 403(b) plan is a Tax Sheltered Annuity (TSA) plan. 

The contributions of a 403(b) plan are tax-deductible. An employer who offers this plan can also match the contributions of a worker. It is not the best financial move, but you can take a loan against your 403(b) retirement savings account. This is also permitted in 401(k) plans.

 

Final Words

These two plans offer the same benefits. The difference between the two is solely based on the type of organization the plan can be offered in. Both make for great retirement savings accounts.

The similarities of the plans make it futile to choose one over the other. Both offer great tax benefits, and both allow contributors to borrow up to 50% of the account’s balance.

What is most important is that you begin to contribute to a retirement plan right away. This will ensure that your years after retirement are filled with comfort and joy as opposed to misery and regret.

Rahul Iyer

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