Paul Haarman explains the 401(k) and 403(b) are unarguably two of the most popular retirement plans. While they are similar in many ways, they are strikingly different in some ways too. A more detailed examination of the key differences and similarities:
The Main Differences between 401(k) And 403(b) Plans
Eligibility: Employees in commercial organizations need to participate in 401(k), while only government and non-profit employees can participate in a 403(b).
Employer matching contributions: Even though it is common for employers to match the contributions made by employees in 401(k), many employers do not do it when their organizations have a 403(b).
Investment: Participants of a 401(k) can invest their funds in a selection of exchange-traded funds (ETFs) or mutual funds as per the selection of the employer, however; Typically investment options in 403(b) plans are restrict to annuities though, in recent times, some mutual funds may also be available.
Catch-up contributions: While both plans offer participants, who are 50 years of age or older, to invest an additional $6,500 as a catch-up contribution, a 403(b) plan allows a further $3,000 per annum to employees who have been with their current employer for 15 years or more.
Vesting schedule: The vesting schedule for a 401(k) plan tends to be long-drawn-out; however, when employers offer a matching contribution in a 403(b) plan, the vesting schedule can be far shorter. It is not unknown for some companies to allow immediate vesting under a 403(b) plan.
Profit-sharing: Some companies offering 401(k) may allow participants to benefit from profit sharing, however, members in a 403(b) plan cannot share in any profits of the employer because, by its very definition, this plan is for non-profits.
Fees: Paul Haarman explains it is common for 403(b) plans to have lower fees than 401(k) plans. Because their reporting requirements are far less strict. It is because they are not subject to the guidelines under the Employee Retirement Income Security Act (ERISA). Which sets out the minimum standards that must be adhere to by qualified retirement plan administrators.
How 401(K) and 403(B) Plans Are Similar
Contribution limits: Both plans allow a maximum contribution of $19,500, with those above 50 being allowed an additional 6,500 in catch-up contributions.
Tax deferral: Contributions to both plans are tax-defer and act to reduce the taxable income for the year. However, you remain liable to pay tax at the time of the distribution. According to https://www.forbes.com, the tax deferral acts to make your investments grow faster. And allows you to take the benefit of a lower tax bracket when you are retired.
Roth options: Though less common, participants can avail both the plans as Roth accounts. That allow them to pay the tax in the same year of their contribution. And to allow their money to become tax-free, thereafter.
Penalties on early distributions: If you take a distribution under any of the plans when you are 59½ years old. Or less, you will have to pay a 10% penalty.
Normally, an individual can contribute to either 401(k) or 403(b), unless they switch jobs that qualify differently. None of the plans are distinctly superior to the other. And each has its pros and cons that you need to live with.