While there are many options for saving for retirement, one that you may not have heard of is a 403(b). It’s commonly referred to as the cousin to a 401(k). Both 401(k) and 403(b) are employer sponsored retirement plans that allow you to contribute pretax dollars to your retirement savings. So what’s the difference? Let’s discuss 401(k) vs 403(b) below.
What is a 401(k) plan?
A 401(k) plan is an employer-sponsored retirement savings plan where employees can make tax-deferred contributions from their salary. Employers can offer a 401(k) as part of their benefits package and may match a portion of the employee’s contribution.
What is a 403(b) plan?
A 403(b) plan is a retirement savings plan for employees of nonprofits, public schools, tax-exempt organizations, and certain ministers. You can invest in either annuities or mutual funds.
What are the similarities between 401(k) and 403(b) plans?
- Both are typically tax deferred. You can contribute your pretax dollars which can decrease your taxable income and therefore may decrease your tax bill. Your money will grow tax-deferred until you are ready to withdraw it. When you withdraw the money then you will pay ordinary income taxes on the withdrawals.
- You generally must wait until you are 59½ to withdraw money from a retirement plan without penalty. If you do withdraw early then you may need to pay a 10% penalty, as well as state and federal income taxes.
- You must begin to withdraw from these accounts at age 72. The required minimum distribution age for both 401(k) and 403(b) plans is 72.
- Both types of accounts have the same annual contribution limits. The 2022 contribution amount for 401(k)s and 403(b)s is $20,500, or $27,000 if you are aged 50 or older. Your contribution amount cannot exceed your total income.
How are 401(k) and 403(b) plans different?
While these plans are quite similar, there are some differences that you need to be aware of.
- The type of employer: The main difference is the type of employer that offers them. 401(k)s are offered by for-profit public sector companies. 403(b)s are offered by nonprofits, churches and certain government agencies such as public schools and universities.
- Investment choice: 401(k)s are generally a mix of mutual funds, stocks, bonds and other securities. Your company may also offer company stock. Assets in a 403(b) are generally annuities and mutual funds.
- Additional contributions: While the annual contribution limits are the same, some 403(b) plans allow an additional contribution of $3,000 per year if an employee has worked for that organization for at least 15 years.
- Higher fees: 403(b)s generally charge higher fees than 401(k)s. Costs do vary from plan to plan so make sure you look to see what fees they charge.
What are the contribution limits for 403(b) and 401(k) plans?
The 2022 contribution limit for both 403(b) and 401(k) plans is $20,500, or $27,000 if you are aged 50 and older.
Is a 403(b) better than a 401(k)?
Both are solid retirement savings vehicles that offer tax advantages and investment options. One is not necessarily better than the other. The type of retirement plan that you are eligible for is dependent on your employer, so you don’t generally get to choose between a 403(b) or a 401(k).
Start saving for retirement today!
401(k) and 403(b) plans are similar and the decision will typically come down to what is offered by your company. The important thing is to take advantage of your employer’s retirement plan and start saving for retirement today. It’s a simple, effortless way to save for retirement.