403b vs. 401k

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

403b vs. 401k vs. 457 Calculator

What’s the Difference Between 401k and 403b Plans?

401k and 403b plans are retirement savings plans employers offer, but they have some key differences.

For-profit companies offer 401k plans, while nonprofit organizations, schools, and certain government entities offer 403b plans.

One significant difference between the two is the investment options available. 401k plans generally offer a more comprehensive range of investment choices, including individual stocks and bonds, while 403b plans often limit investment options to annuities and mutual funds.

Another difference is the contribution limits. As of 2023, the annual contribution limit for a 401k plan is $22,500, while the limit for a 403b plan is also $22,500. In 2024, both of these will increase to $23,000. However, employees with at least 15 years of service with a nonprofit organization may be eligible to contribute an additional $3,000 per year to a 403b plan, up to a lifetime limit of $15,000.

Finally, the rules regarding loans and withdrawals from the plans also differ. For example, 401k plans may allow loans and hardship withdrawals, while 403b plans may allow only certain types of hardship withdrawals.

Related Reading: 401a vs 403b

403B Vs 401K

What Is A 403b Plan?

A 403b plan is a retirement savings plan for employees of specific organizations, such as public schools, universities, and nonprofits. It is similar to a 401k plan, which for-profit companies offer.

With a 403b plan, employees can contribute a portion of their pre-tax income to the plan, which can then be invested in various investment options, such as mutual funds and annuities. The contributions and any investment earnings grow tax-deferred until retirement, at which point withdrawals are taxed as income.

403b Pros

Here are some potential advantages of a 403b plan:

  • Tax advantages: Contributions to a 403b plan are made on a pre-tax basis, which means you don’t have to pay income tax on the money you contribute until you withdraw it during retirement. Additionally, earnings on your contributions grow tax-deferred, which means you won’t have to pay taxes on any gains until you withdraw the money.
  • Employer contributions: Many employers offer a matching contribution to their employees’ 403b plans, which can help you save even more for retirement.
  • Higher contribution limits: The contribution limits for a 403b plan are higher than those for an individual retirement account (IRA), allowing you to save more money each year.
  • Retirement savings discipline: A 403b plan is a powerful tool for encouraging retirement savings discipline. Contributions are typically made through payroll deductions, which means you don’t have to think about setting money aside every month.
  • Investment options: 403b plans typically offer a wide range of investment options, including mutual funds, annuities, and target-date funds, allowing you to choose investments that align with your retirement goals and risk tolerance.

Overall, a 403b plan can be a powerful tool for saving for retirement, providing tax advantages, employer contributions, and investment options to help you build a secure retirement future.

403b Cons

While 403b plans offer several advantages, there are also some potential disadvantages to consider:

  • Limited access to funds: Unlike other retirement plans, you may have limited access to your 403b plan until retirement. Early withdrawals may be subject to taxes and penalties.
  • Fees: 403b plans may come with fees and expenses, including administrative fees, investment fees, and surrender charges for annuities, which can eat into your investment returns over time.
  • Limited investment options: While 403b plans offer various investment options, you may be limited to the investment options offered by your employer or plan provider, which may not align with your investment goals or risk tolerance.
  • Required minimum distributions (RMDs): Once you reach age 73, you must take annual withdrawals from your 403b plan, which can impact your retirement income and tax situation.
  • Lack of portability: If you change jobs, you may be unable to roll your 403b plan into a new employer’s retirement plan, limiting your investment options and potentially resulting in higher fees.

Overall, a 403b plan can be a valuable tool for retirement savings. Still, weighing the potential advantages and disadvantages is essential to determine if it’s the right choice for your financial situation and goals.

403b Contribution Limits

The contribution limits for a 403b plan are set by the Internal Revenue Service (IRS) and can change from year to year. For 2023, the contribution limit for a 403b plan is $22,500 for individuals under age 50. For those over age 50, a catch-up contribution of up to $7,500 is allowed, bringing the total contribution limit to $30,000. In 2024 the contribution limit increases to $23,000. For those over 50 the total increases to $30,500.

It’s important to note that these contribution limits apply to your contributions to the plan and do not include any employer contributions. However, the total contribution limit (including both personal and employer contributions) cannot exceed the lesser of 100% of your compensation or $66,000 in 2023; in 2024, this increases to $69,000.

Can You Contribute To Both A 403b And 457b?

Yes, an individual can contribute to both a 403b and a 401k plan simultaneously, as long as they are eligible to participate in both plans. However, the contribution limits for each plan are separate and may differ, so it’s essential to be aware of and follow the contribution limits for each plan. Additionally, suppose an individual is contributing to both plans through their employer. In that case, they may need to coordinate with their HR or benefits department to ensure that the total contribution amount does not exceed the annual limit set by the IRS.

401K Vs 403B

How do the withdrawal rules and penalties differ between a 403b and a 401k plan?

Both 403b and 401k plans are retirement savings plans offered by employers, but they are subject to different rules and penalties regarding withdrawals.

Withdrawal Rules:

A 403b plan generally allows withdrawals at age 59.5 or upon retirement or separation of service from the employer. However, some 403b plans may allow withdrawal before age 59.5 for certain qualifying events, such as disability or financial hardship.

On the other hand, a 401k plan allows withdrawals to be made at age 59.5 or upon retirement or separation of service from the employer, but it also allows for loans and hardship withdrawals before age 59.5.

Penalties:

If you withdraw from a 401(k) or 403(b) plan before age 59.5, you may be subject to a 10% early withdrawal penalty and any applicable taxes. However, 401k plans also allow hardship withdrawals in certain situations, such as for medical expenses or to prevent eviction from a primary residence. Still, these withdrawals may also be subject to taxes and penalties.

In summary, while 403b and 401k plans have similar withdrawal rules, a 401k plan offers more flexibility in the form of loans and hardship withdrawals before age 59.5. Still, these withdrawals may be subject to taxes and penalties.

Helpful Tool: Get ready for retirement and find out how to withdraw monthly payouts from your 403b with our 403b payout calculator

What Is A 401k Plan?

A 401k plan is a tax-advantaged retirement saving plan many employers in the United States offer. The name “401k” comes from the U.S. tax code section governing these plans.

In a 401k plan, employees can contribute a portion of their pre-tax income to the plan, which is then invested in various investment options such as mutual funds or exchange-traded funds (ETFs). These contributions are deducted from the employee’s paycheck before taxes are applied, which can reduce their taxable income and potentially lower their tax bill.

401k Pros

There are several advantages to participating in a 401k plan, including:

  • Tax advantages: Contributions to a 401k plan are made with pre-tax dollars, which can reduce your taxable income and lower your tax bill. Additionally, any earnings on your investments grow tax-deferred until withdrawal, potentially allowing your money to compound and grow faster than it would in a taxable account.
  • Employer matching contributions: Many employers offer matching contributions to their employees’ 401k plans, which can be a valuable perk. These matching contributions can help boost your retirement savings without any additional effort.
  • Investment options: 401k plans typically offer a range of investment options, such as mutual funds or exchange-traded funds (ETFs), which can allow you to diversify your portfolio and potentially earn higher returns.
  • Automatic contributions: Many 401k plans offer automatic contributions, which can make it easier to save for retirement by allowing you to set it and forget it. These contributions are deducted from your paycheck before you even see the money, which can help you avoid the temptation to spend it elsewhere.
  • Portability: If you change jobs, you can typically roll over your 401k plan into an IRA or your new employer’s retirement plan. This allows you to grow your retirement savings and avoid tax penalties or fees.

A 401k plan can be a powerful tool for building a retirement nest egg, providing tax advantages, potential employer matching contributions, and various investment options.

401k Cons

While there are many advantages to participating in a 401k plan, there are also some potential drawbacks to consider, including:

  • Limited investment options: While 401k offers a range of investment options, they may not be as diverse as those available in an individual retirement account (IRA) or other investment accounts. This can limit your ability to customize your investment strategy and potentially earn higher returns.
  • Early withdrawal penalties: If you withdraw money from your 401k plan before age 59 1/2, you may be subject to a 10% early withdrawal penalty in addition to income taxes. While exceptions exist to this rule, such as for medical expenses or first-time home purchases, it’s generally best to leave your retirement savings untouched until retirement age.
  • Required minimum distributions (RMDs): Once you reach age 73, you must start taking distributions from your 401k plan each year, regardless of whether you need the money. These distributions are subject to income tax, which can reduce your retirement income and potentially push you into a higher tax bracket.
  • Limited flexibility: Because 401k plans are employer-sponsored, you may not have as much flexibility or control over the plan’s features or investment options as you would with an individual retirement account (IRA) or another investment account.
  • Fees: Some 401k plans may have higher fees or expenses than other retirement accounts, affecting investment returns over time.

Overall, while a 401k plan can be a valuable retirement savings tool, it’s essential to consider the potential drawbacks and limitations before making investment decisions.

Difference Between 401K And 403B

401k Contribution Limits

The contribution limits for 401k plans are set by the Internal Revenue Service (IRS) each year. For 2023, the contribution limit for employees who are under the age of 50 is $22,500. Employees aged 50 or older can make an additional catch-up contribution of up to $7,500 for a total contribution limit of $30,000. In 2024 it increases to $23,000 with a catch-up contribution of $7,500.

It’s important to note that these contribution limits apply to your contributions and any employer-matching or profit-sharing contributions you may receive. In addition, there are limits on the total amount of contributions that can be made to a 401k plan each year, including employee and employer contributions.

Next Steps

After reading through this guide, we hope you now have insight into the distinct elements of 403b and 401k plans. We emphasize that it is essential to consider the advantages and disadvantages of each option when deciding which plan would best suit your retirement goals. Additionally, speaking with a financial professional is always recommended to receive expert advice on selecting the investment plan tailored to your lifestyle and future. Lastly, if you’ve decided which route to take for your upcoming retirement investments, why not request a free quote today? Let us help you connect with the perfect plan providers for your ideal retirement portfolio!

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Frequently Asked Questions

What are the differences between a 403b and a 401k plan for tax-exempt organizations?

A 403b plan is for tax-exempt organizations, while a 401k plan is for for-profit companies. Both allow pre-tax contributions, but 403b plans have more limited investment options.

How do 403b and 401k plans compare to tax-advantaged retirement plans?

403b and 401k plans are tax-advantaged retirement plans, allowing pre-tax contributions and tax-deferred growth. They differ from other plans in their eligibility requirements and contribution limits.

How do the tax benefits of a 403b and a 401k plan differ for retirement savings?

403b and 401k plans offer tax benefits, such as pre-tax contributions and tax-deferred growth, but eligibility, contribution limits, and investment options may differ.

What are the eligibility requirements for catch-up contributions in a 403b or a 401k plan?

Catch-up contributions are available to participants aged 50 or older in 403b and 401k plans, subject to annual limits and plan rules.

How do 403b and 401k plans compare to employer-sponsored retirement plans?

403b and 401k plans are employer-sponsored retirement plans that offer tax benefits and may include employer contributions. When comparing 403b vs. 401k retirement plan options, both have similar tax advantages but may differ in eligibility and investment options. Other employer-sponsored plans include pensions and profit-sharing plans.

What are the disadvantages of a 403b?

A 403b plan’s potential disadvantages include limited investment options, high fees, and restricted withdrawals before retirement age.

Is a 403b a good retirement plan?

A 403b can be a good retirement plan for employees of nonprofit organizations, as it offers tax-deferred contributions and potential employer matching. However, its effectiveness depends on individual circumstances.

What happens to 403b when you quit?

When you quit a job, you typically have several options for your 403b plan, including leaving it with the current provider, rolling it over to a new plan, or withdrawing the funds (potentially subject to taxes and penalties).

Can I Contribute to a 401k and 403b Plan?

Yes, you can contribute to both a 401k and a 403b plan simultaneously as long as you meet the contribution limits for each plan.

403b vs. Roth ira

A 403b is a tax-deferred retirement plan offered by nonprofit organizations, while a Roth IRA is an individual retirement account with tax-free withdrawals in retirement.

403b plan vs. 401k contribution limits

The contribution limits for a 403b and a 401k are the same, with a maximum of $23,000 in 2024 (plus an additional $7,500 catch-up contribution for those aged 50 or older).

401k and 403b advantages and disadvantages

401k and 403b plan advantages include tax-deferred contributions and potential employer matching. Disadvantages may include limited investment options and high fees.

How do the features of a 403b vs. 401k for nonprofit employees compare?

Both 403b and 401k plans are tax-advantaged retirement savings vehicles. However, while 401k plans are offered by for-profit entities, 403b plans are specifically designed for nonprofit, religious, and public education employees. Both plans allow for employer contributions and elective deferrals, but investment options and administrative structures might differ. Nonprofit employees must assess specific plan features and benefits.

Shawn Plummer, CRPC

Chartered Retirement Planning Counselor

Shawn Plummer is a Chartered Retirement Planning Counselor, insurance agent, and annuity broker with over 14 years of first-hand experience with annuities and insurance. Since beginning his journey in 2009, he has been pivotal in selling and educating about annuities and insurance products. Still, he has also played an instrumental role in training financial advisors for a prestigious Fortune Global 500 insurance company, Allianz. His insights and expertise have made him a sought-after voice in the industry, leading to features in renowned publications such as Time Magazine, Bloomberg, Entrepreneur, Yahoo! Finance, MSN, SmartAsset, The Simple Dollar, U.S. News and World Report, Women’s Health Magazine, and many more. Shawn’s driving ambition? To simplify retirement planning, he ensures his clients understand their choices and secure the best insurance coverage at unbeatable rates.

The Annuity Expert is an independent online insurance agency servicing consumers across the United States. The goal is to help you take the guesswork out of retirement planning and find the best insurance coverage at the cheapest rates

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