Difference between 401K and 403B

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Difference between 401K and 403B: When it comes to retirement from employment, we are introduced to two of the most common types of plan, 401K and 403B.

The basic difference between 401k and 403b is the respective type of employers who can offer them. However, most people are still confused about them.

Basically, the terms given to these retirement plans are in reference to the section of the tax code outlining them.

What is 401K

401k plans are usually offered by profit-yielding companies and organizations. This type of plan involves certain administrative processes and would thus require a bigger company budget.

What is 403B

On the other hand, 403b plans are common among non-profit government organizations, school districts, hospitals, religious groups, and companies.

These entities are typically tax-exempt organizations and have very small budgets. Hence, administrative costs for 403b plans are lower in order to help employees save up for their retirement.

Difference between 401K and 403B

Difference between 401K and 403B

We can say that there is only a minor difference between 401k and 403b. For the most part, they are actually similar.

For instance, both 401k and 403b plans allow you to set aside a pre-tax amount of up to $17,500 per year from your paycheck to save up for your retirement.

That has been the standard elective deferral limit in 2014.

This limit applies to those who are under 50 years old. In addition with both plans, employees aged 50 and above can make “catch-up” contributions of $5,500 up to a total of $23,000.

As to the fees involved with the processing of each plan, the administrative costs of 401k plans are generally higher than those of the 403b plans.

But regardless, what you need to find out is the amount charged by the investment itself, whether mutual fund or annuity. In some cases, unnecessary fees can take away a significant amount from your retirement fund.

Also, the information is not normally written on the statement so you might have to inquire about it with the management company that administers the plan.

By default with 401k and 403b retirement plans, the management company generally selects the investment options available inside the plan.

Nevertheless, you can still request other investment options from your employer. If you are qualified, you may personally opt for a Roth IRA or a traditional IRA.

That is if you want to invest in another way than what was offered to you.

Generally, depending on the type of employment you have, you do not get to choose the plan of your preference.

So if you are working for a company who offers 401k plans, you cannot opt for a 403b just because the costs are lower.

But regardless, knowing the difference between 401k and 403b helps for a better understanding of these two common plans.

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