While 401(k) is a widely understood retirement plan and most understand how it works, very few people have even heard of a 403(b) plan. One might easily think 403(b) retirement plans are similar to 401(k) plans. In theory, both are identical in many ways.
403(b) and 401(k) plans are both retirement plans that are supported by employers and both retains special tax treatment. But there’s a fundamental difference between 401(k) and 403(b) – your eligibility.
If you’re an employee in public schools and certain tax-exempt organizations such as schools and hospitals (as determined by Section 501(c)(3) of the IRC), you’re eligible for 403(b). Teachers, school administrators, school personnel, nurses, doctors, professors, researchers, librarians and ministers are contributors to the plan.
The 401(k), on the other hand, covers private-sector employees. See what is a 401(k) plan.
Comparing 401(k) vs 403(b) Plans
Let’s take a look at how 403(b) plans are identical to 401(k) plans
- Employees get immediate tax advantages, and free money matched by the employer.
- Contribution limit reaches $15,000 (below 50 years old) or $5,000 up to $20,000 (over 50 years old).
- Your retirement savings is forwarded to & managed by an authorized administrator.
- The capital is allowed to compound tax-free until it’s taken as a distribution after you’re retired.
- When you change job; retire; become disabled or die, both accounts can be rollover to IRA.
If you’re eligible for 401(k)
- You’ll ONLY have one investment plan that your company decides. Usually, the employer will decide which 401(k) plan provider and you have the one and only plan that is open to you. Freedom of choice isn’t a priority here.
- You’ll be qualified for a company match. A company matching contribution allows you to get some free money that equals to a half of your contribution up to 3% of annual total salary.
- You’re subject to ERISA (Employment Retirement Income Securities Act) strict legal requirements. This is the bitter part. Monitoring will be regularly conducted
How 403(b) differs from 401(k)
- Unlike 401(k), any employer’s contribution to the account can be withdrawn without penalty if it invested in an annuity. Since non-profit organizations do not pay taxes, these money is clear from tax liability.
- In several cases, you can evade ERISA requirements. No extra accounting and there is next to no administration costs.
- You’ll have more than one provider or vendor to choose from. Thus, you have more freedom of making a right choice for yourself and your money.
- Because you have more than one option, you can choose several vendors to manage your money. This way, you’re likely to reap potential gain or loss in spite of similar 403(b) benefits. One of the gains is quarterly rebalancing, which will rebalance your fluctuating portfolio value and could enhance your portfolio performance in the long run.
It is also worth noting that if you’re eligible for 403(b) plan, don’t assume that all employers will match your contribution. Most companies that offer a 403(b) retirement plan are not known for matching the contributions of their employees. If you’re unsure, it’s best to talk to them and figure out what your employer’s retirement plan is.
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2010 Contribution Limits
The 401(k) contribution limit for is $16,500 for those under 50 years old. For anyone between the ages of 50 and 59 ½ years old you also have the option of contributing an additional $5,500 as a catch-up contribution.The IRA contribution limit for is $5,000 for those under 50 years old, with a $1,000 catch-up contribution option for those between 50 and 59 ½ years old.