Your guide: 401k vs 403b: What’s the Difference?
A big part of being financially stable is making retirement plans. The 401(k) and 403(b) are two well-known employer-sponsored retirement plans. Even though they have some things in common, knowing what makes them different can help you make smart choices about your financial future. Let’s talk about what makes these retirement accounts different and how they can help you reach your long-term savings goals.
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401k vs 403b: What’s the Difference?
Planning for retirement is important for making sure you have enough money in the future. 401(k) and 403(b) plans offered by employers can help you save money on taxes and make investments. With these plans, employees can save for retirement by having money taken out of their paychecks automatically. Knowing the differences between each plan can help you save as much as possible for retirement. To help you make smart choices about your retirement, let’s look at the most important parts of 401(k) and 403(b) plans.
Understanding 401(k) Plans
401(k) plans are ways for employees of for-profit businesses to save for retirement. With these plans, employees can put away some of their salary before taxes. The money in a 401(k) grows tax-free until it is taken out, which usually happens when the person retires. A lot of employers will match your contributions, which is like getting money for free to help you save for retirement. 401(k) plans usually offer a range of mutual funds as investment options, and sometimes they also offer company stock.
Looking at 403(b) Plans
403(b) plans, which are also called tax-sheltered annuities, let people who work for public schools, non-profits, and some religious groups save for retirement. Like 401(k) plans, 403(b) plans let you put money away and let it grow tax-free. When it comes to investments, 403(b) plans, on the other hand, usually only offer annuities and mutual funds. Because of recent changes, many of these choices are now bigger. In some 403(b) plans, employers will match your contributions, but this happens less often than in 401(k) plans.
Some important ways that 401k vs 403b plans are alike
A lot of the important parts of both 401(k) and 403(b) plans are the same. Both have tax benefits that let employees put money in before taxes are taken out. This saves for retirement while lowering current taxable income. IRS rules say that the most you can put into each plan each year is the same amount. The limit for 2024 is $23,000, and people aged 50 and up can add an extra $7,500 as a catch-up payment. Both plans also have Roth options, which let you put money in after taxes and take money out tax-free when you retire.
Different Things About 401(k) Plans
Companies that make money usually offer 401(k) plans. Most of the time, they offer more investment choices than 403(b) plans. In a lot of 401(k) plans, you can invest in company stock. In 401(k) plans, employer matching contributions are more common, and many businesses will match a portion of what their employees put in. Nondiscrimination testing is done on 401(k) plans to make sure they don’t unfairly help high-paid employees. This can sometimes make it hard for people with high incomes to contribute.
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Different Things About 403(b) Plans
403(b) plans are only available to people who work for public schools, non-profits, and some religious groups. In the past, these plans had fewer investment options and mostly focused on annuities. Still, a lot of them now include mutual funds as well. 403(b) plans may be cheaper to run than 401(k) plans.
Some 403(b) plans let employees with 15 years of service make an extra catch-up contribution. This lets people who are eligible put in up to $3,000 more a year, up to a certain limit per person.
401(k) vs. 403(b) as Investment Options
Most of the time, 401(k) plans give you more investment choices. Often, these are different mutual funds, exchange-traded funds (ETFs), and sometimes single stocks. Participants can make well-rounded portfolios that fit their risk tolerance and investment goals thanks to the variety. In the past, 403(b) plans didn’t offer as many options.
Usually, they only offer annuities and mutual funds. But many 403(b) plans now let you choose from more investments. If you want to make smart investment choices, you should look over the specific options in your plan.
Employer Contributions: Looking at Different Methods
In 401(k) plans, employers are more likely to match employee contributions. Matching is a way for many for-profit businesses to find and keep employees. A typical match could be 50% of what the employee puts in, up to 6% of their salary.
Employers can put money into 403(b) plans, but this doesn’t happen very often. When it is available, matching in 403(b) plans might not be as good as it is in 401(k) plans. However, some 403(b) plans may offer non-elective contributions, which means that the employer contributes even if the employee doesn’t choose to.
When to get your money: 401(k) vs. 403(b)
When your employer puts money into your retirement account, this is called “vesting.” There are often vesting schedules in 401(k) plans. It’s possible for these to be graded (20% vested every year) or cliff (100% vested after a certain amount of time).
Most of the time, vesting schedules for 403(b) plans are better. Many of them let you get your employer contributions right away. In other words, you get to keep all of your employer’s contributions as soon as they are made. But vesting schedules can be very different between plans, so it’s important to know the rules of your own plan.
Contributions to make up for lost time: more chances to save
People aged 50 and up can make catch-up contributions to both 401(k) and 403(b) plans. This extra contribution limit will be raised to $7,500 in 2024. This lets older workers save more for retirement as they get closer to the age of retirement. 403(b) plans have an extra catch-up provision that no other plans do.
Employees who have worked for the company for 15 years can contribute an extra $3,000 a year. There is a lifetime limit on this, and it needs to be carefully calculated. These catch-up options are great ways to save as much as possible for retirement in the years before you retire.
Penalties and exceptions for early withdrawal
People who take money out of their 401(k) or 403(b) plans before they turn 59½ are charged a 10% penalty. This fine is on top of the normal income taxes that are due on the withdrawal. That being said, there are some exceptions to this penalty.
Some of these are being disabled, dying, or leaving the service at age 55 or older. Some plans let you take money out in times of hardship for certain types of financial emergencies. You should know that taking money out of your retirement accounts too soon can have a big effect on your long-term savings. Before taking money out of your retirement accounts too soon, think about other options.
Minimum distributions that must be made
Minimum distributions (RMDs) must be made from both 401(k) and 403(b) plans. As of 2024, these withdrawals must start when the person turns 73 years old. Your account balance and how long you expect to live are used to figure out your RMD.
If you don’t take your RMDs, you could face big tax penalties. RMDs must also be taken out of Roth accounts in 401(k) and 403(b) plans. Roth IRAs, on the other hand, do not need RMDs while the owner is still alive.
What to Choose Between 401(k) and 403(b) Plans
The boss usually tells the worker which of a 401(k) plan and a 403(b) plan to choose. If you can use both, think about things like fees, investment choices, and employer contributions. Review the specifics of each plan your company offers.
Consider your long-term financial objectives and your risk tolerance when making your decision. If you can, try to put in enough to get the most out of any employer match. You won’t be leaving free money on the table this way. Remember that you can contribute to both types of plans as long as you don’t go over the maximum amount allowed by your overall contribution limits.
How to Get the Most Out of Your Retirement Savings Plan
There are ways to make the most of your retirement savings, whether you have a 401(k) or a 403(b). First, try to put in at least enough to get the full employer match, if your company offers it. You might want to raise your contributions over time, especially if your income goes up. Catch-up contributions can help you save money if you are eligible.
To keep your desired asset allocation, you should review and rebalance your investment portfolio regularly. Find out about the fees that come with your plan and the different ways you can invest. Talking to a financial advisor could help you come up with a complete retirement plan that fits with your overall financial goals.
Conclusion: 401k vs 403b
In conclusion, both 401k vs 403b plans are great ways to save for retirement while getting tax breaks. Even though they have a lot in common, knowing what makes each one different can help you make the most of your retirement savings options.
The most important thing is to start saving early and regularly, whether you have a 401(k), 403(b), or both. You can build a strong financial future by putting in as much as possible, taking advantage of employer matches, and making smart investment choices. Also, keep in mind that planning for retirement takes time. These employer-sponsored plans can help you reach your retirement goals.