401(k) and 403(b) are the two most common forms of retirement accounts for employees. 401(k) plans are issued by for-profit companies to those eligible employees who have contributed pre-tax or post-tax money through salary deduction. Whereas, 403(b) Schemes are issued to non-profit organizations and government employees. Similarly, 403(b) plans are free from nondiscrimination testing, while 401(k) plans are not.
Well, if you need to choose one plan of them, let’s learn the key differences so that you can choose easily between them.
What’s the Difference Between a 401(k) and a 403(b)?
|Employer Type||Usually offered by public or for-profit companies||Usually offered by non-profits|
|Investment Choices||Stocks, bonds, mutual funds, variable annuities, index funds, or ETFs||Limited to mutual funds and annuities|
|Single Employee||Solo 401(k) for one-person businesses||No solo version|
|Plan Limits||No extra contributions||Qualified organization employees with 15 years can contribute more|
Let’s see the difference in detail…
The Type of Employer
A 401(k) plan is mostly issued by for-profit companies so that the employees can save for retirement. Whether or not your employer offers a 401 (k) depends on the state in which you live and the size of the business. Most states have laws that determine when an employer needs to provide retirement options for their employees. If you are a business owner and sole employee, you can set up a one-participant 401(k) plan for you and your partner.
403(b) only be issued by public schools, colleges, universities, churches, or 501(c)(3) charities. To be eligible for this type of plan, you must work for one of these types of employers.
Investment choices are also a difference between 401(k) and 403(b) plans. Most of the 401(k) plans provide different types of mutual funds as their investment choices but may involve other types of investments. Whereas, 403(b) plans only provide mutual funds and annuities. Technically, 403(b)s are more limited to investment options than 401(k)s, but 403(b) can be as flexible as 401(k) if mutual funds have choices between mutual funds.
Most of the 401(k) plans do not allow you to withdraw money until you reach 59 1/2 of age or meet certain IRS requirements. You just have to start withdrawing money at least by age 72.56, Roth 401(k) plans are the same but there are tax advantages.
Single Employee Options
Only small business owners who are their employees can open their own 401(k). You can find and get these retirement plans from the brokers.
One difference applies to a small subgroup of employees, that if you have 15 years of service and your company is considered a “qualified organization”, you will be eligible to contribute more in your 403(b) over the annual limit of $19,500.9. This option is not available with 401(k).
Both the 401(k) and 403(b) are great retirement plans. Both plans have the same basic contribution limits and offer Roth options. If you are lucky enough to choose between the two, you will have to consider the investment options more carefully. 401(k) gives you more flexibility when you choose your investment. Whereas, 403(b) can only offer mutual funds and annuities. But basically, it is not bad, because there are thousands of mutual funds to choose from.