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403b Vs 401k: Differences Between Both The Tax-Advantaged Retirement Plans
Coined after sections 403(b) and 401(k) of the tax code, both 403b vs 401k plans are tax-advantaged and defined contribution retirement pathways that employers offer. The key difference between the two employer-sponsored plans is – 401k plans are by the private sector for for-profit organizations, while 403b plans are only accessible to government employers and non-profit organizations.
There is yet another historical difference between 403b and 401k places, which lies within the investment option each of them offers; however, that difference reduces over time. The 403b plan, which was once known as the tax-sheltered annuities, faced restrictions over an annuity format. This restriction was taken off in 1974.
In this article, we shall explore further details on the 403b vs 401k retirement plans. So, let us now begin.
Key Takeaways
- Both 403b vs 401k plans offer tax advantages after retirement plans, which employers provide to their employees.
- For-profit companies can offer 401k plans to eligible employees who donate pre or post-tax funds through payroll deduction.
- Employees working in government entities or nonprofit organizations get access to 401k plans.
- While a 401k plan is subject to nondiscrimination testing, 403b plans are exempted from it.
- 403b plans fall under income restrictions, while 401k plans don’t.
What Is A 401k Plan?
A 401k plan is a qualified retirement plan that an employer sponsors. In this type of plan, the eligible employees can make tax-referred contributions from within their salaries or wages over a pretax basis. Employers that offer a 401k plan may make non-elective or matching contributions to the plan on behalf of the employees who are eligible and might also share a profit-sharing objective with the plan. The funds earned in a 401k plan arise on a tax-deferred basis. Private employers offer 401k plans.
What Is A 403b Plan?
A 403b plan is yet another variant of a retirement plan. It is specifically built for those employees who work in public schools, certain ministers, and other tax-exempt organizations. These plans may invest in their mutual funds or annuities. A 403b plan is another term for a tax-sheltered annuity plan. The features of a 403b plan are found quite in comparison to a 401k plan.
Employees who work in a tax-exempt organization will be eligible to take part in the plan. The list of participants includes school administrators, teachers, professors, nurses, government employees, doctors, and librarians.
“To participate in a 403(b) plan, your income cannot be more than the annual limit set by the IRS, which is $305,000 in 2022.” – Investopedia.
403b Vs 401k: Legal Differences
Unlike the 401k plan, the 403b plan does not have to comply with many of the regulations that lie within the Employee Retirement Income Security Act. mentionably, government employers, non-electing churches, and some other organizations may face exemption from the ERISA requirements.
For instance, 403b plans are safe from nondiscrimination testing. Annually done, this testing is developed to prevent the highly compensated or managerial level employees from getting a disproportionate quantity of benefits from the given plan.
The reason behind this, and other such exemptions, is the long-withstanding Department of Labor regulation, which states that the 403b plan does not fund any contribution. However, if an employer still contributes to the 403b accounts of an employee, they will be subject to the guidelines by the ERISA and the reporting requirements for the ones that offer 401k plans.
403b Vs 401k: Practical Differences
While 403b plans may be legally able to offer employer matches to the contributions of the participants, most employers are reluctant to offer such matches so they would not have to let go of the ERISA exemption.
Therefore, 401k plans provide match programs at a much higher cost. However, if the employee has served over 15 years of service with government agencies or non-profit organizations, the case is a little different. In that case, they might be able to make extra catch-up contributions towards their 403b plan. In comparison, the ones with a 401k plan cannot avail the same.
There is yet another difference between 403b and 401k plans, which states that for the non-ERISA 40b plans, the expense ratio may be much lower as they are subject to less strict reporting requirements.
Primarily, the providers of the plan and the administrators are different for each of the plans. Notably, mutual fund companies administer the 401k plans, while insurance companies are in charge of the administration of the 403b plans. This is the one reason why multiple 403b plans limit their investing options and prominently feature the annuities, while 401k plans offer more of the mutual funds.
403b Vs 401k: Which Is Better?
To define in simple terms, both of these plans are quite similar; therefore, choosing between them is a tough choice. The automatic savings opportunities, high contribution limits, and potential matching funds over employer-sponsored programs make both of the plans the perfect choice for employees who want to save for retirement.
However, are you still looking forward to choosing between 403b vs 401k plans? If your answer is yes, then here are some of the points that you must consider before registering yourself for one:
- How will the employer contribute towards the plan?
- What are the investment options that you are getting
- What is the vesting period for each of the plans?
Frequently Asked Questions!! (FAQs)
Here are some of the most asked questions on the internet about 403b vs 401k plans.
Ans. 403b retirement plan does not allow any cash withdrawal. This rule stays intact even after retirement, resignation, or termination, regardless of the length of the employment.
Ans. If you want to know the rules and regulations about the 403b retirement plans, you can follow the IRS website to get detailed information about the same.
Ans. Once you retire, you have the freedom to choose regular withdrawals, a lump sum distribution of the total funds, or the Required Minimum Distribution, which starts at the age of 73.
The Bottom Line
Well then, the 403b vs 401k plans are quite similar as far as we consider the retirement pathways. They both have the same contribution limits, and Roth options and need the participants to attain the age of 59 before they can get access to the distributions.
I am hoping this article has helped you out in the correct way. If there is anything else that you would like to add, please feel free to drop a comment below!
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