Difference between 403b vs. 401k

In navigating the realm of retirement planning, understanding the distinctions between various savings options is crucial. Two commonly discussed retirement plans are the 403(b) and the 401(k). These plans, while similar in some aspects, differ significantly in terms of eligibility, contribution limits, investment options, and administration.

What is 403b?

A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement savings plan available to employees of certain tax-exempt organizations, including public schools, hospitals, religious organizations, and nonprofit organizations. Similar to a 401(k) plan offered by for-profit employers, a 403(b) plan allows employees to save for retirement on a tax-advantaged basis. 403(b) plans provide valuable retirement savings opportunities for employees of certain nonprofit and tax-exempt organizations, helping them build a nest egg for retirement while enjoying tax advantages along the way.

Key Features of 403b:

• Employee Contributions: Employees contribute a portion of their pre-tax income to their 403(b) account, reducing their taxable income for the year.
• Employer Contributions: Some employers may also make contributions to their employees’ 403(b) accounts, either as matching contributions based on the employee’s contributions or as non-elective contributions.
• Tax-Deferred Growth: Contributions to a 403(b) plan grow tax-deferred, meaning that investment earnings are not taxed until withdrawn.

What is 401k?

A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck on a tax-deferred basis. 401(k) plans typically offer a range of investment options, such as mutual funds, exchange-traded funds (ETFs), and sometimes employer stock. Employees can choose how to allocate their contributions among these investment options based on their risk tolerance and retirement goals.

Key Features of 401k:

• Employee Contributions: Employees contribute a portion of their pre-tax income to their 401(k) account, reducing their taxable income for the year.
• Employer Contributions: Many employers offer matching contributions to their employees’ 401(k) accounts, typically based on a percentage of the employee’s contributions.
• Tax-Deferred Growth: Contributions to a 401(k) plan grow tax-deferred, meaning that investment earnings are not taxed until withdrawn. This allows investments to compound over time, potentially leading to significant growth in the account balance.

Difference between 403b and 401k

Basis	403(b)	401(k)
Meaning	A 403(b) plan is a retirement savings plan offered to employees of certain tax-exempt organizations, such as public schools, hospitals, and nonprofit organizations.	A 401(k) plan is a retirement savings plan offered to employees of for-profit organizations, allowing them to save and invest a portion of their pre-tax income for retirement.
Eligible Employers	403(b) plans are available to employees of certain tax-exempt organizations, such as public schools, hospitals, religious organizations, and nonprofit organizations.	401(k) plans are typically offered by for-profit employers to their employees.
Contribution Limits	The contribution limits for 403(b) plans may be different from those of 401(k) plans, with special catch-up contributions available for employees with at least 15 years of service.	401(k) plans have specific contribution limits set by the IRS, which may differ from those of 403(b) plans.
Investment Options	403(b) plans typically offer investment options such as annuities and mutual funds.	401(k) plans usually offer a broader range of investment options, including mutual funds, ETFs, and employer stock.
Plan Administration	403(b) plans are often administered by insurance companies or mutual fund companies.	401(k) plans may be administered by financial institutions, such as banks or brokerage firms, or by third-party administrators.
Non-Discrimination Testing	403(b) plans may be subject to less stringent non-discrimination testing requirements compared to 401(k) plans.	401(k) plans are subject to rigorous non-discrimination testing to ensure that benefits are not disproportionately provided to highly compensated employees.
Legal Requirements	403(b) plans are governed by specific regulations under Internal Revenue Code (IRC) Section 403(b).	401(k) plans are governed by regulations under IRC Section 401(k).

403b and 401k – FAQs

May I transfer my 403(b) from a 401(k) instead?

Yes, except by some few exceptions, you can continue to roll over your 403(b) to a 401(k) under new employment which took you from the non-profit/public sector to the private sector, as long as the 401(k) plan accepts the rollovers.

Are 403 (b) and 401 (k) plans mandatory? Must the employer match the contribution?

There is not so mandatory for employer matches in either plan in common. Be sure to inquire with your job for exactly how they handle open matches if you have not already.

Can I have both a 403(b) and a 401(k) at the same time?

Technically, yes. Does one job has these two plans for you? While the two annual contributions (per individual) limit is N/A same level of personal plan ($23,000 in 2024 plus $7,500 for catch-up), the 401(k) limit is $19,500, plus $6,500 per individual for catch-up, for total single-plan contribution limit.

What exactly are the characteristics that set both Roth 403(b) and Roth 401(k) above their traditional partners?

Putting in Roth money is done by using after-tax dollars and tax-free withdrawals are qualified ones. Pre-tax contributions are taken from your conventional income, while the regular withdrawals are taxed as ordinary income.

May I take a loan to withdraw from my 403(b) or 401(k)?

In most cases it is prime for this purpose that provisions are made for loans. However, the period of repayment and the available amount are subject to programmatic rules. Generally, you can loan not more than $50,000 – which is smaller than your vested account value – whichever option is less. Although cash advance using retirement plans is a possibility, one shouldn’t do it unless they have a solid financial plan against the risk their retirement account is exposed to or the fees they have to pay.