Depending on your employer, you may have access to a 401(k), 403(b), or both. While similar to the 401(k) in many ways, the 403(b) has some important differences you need to bear in mind when choosing your retirement plan.
While less well known than the 401(k), 403(b) retirement plans are common enough that 25 percent of American employees have one in their retirement portfolio, accounting for roughly a trillion dollars in retirement savings.
Both the 401(k) and 403(b) are tax-deferred retirement plans, but they come with some significant differences, including whether your employer can even offer a 403(b).
What is a 401(k)?
A 401(k) is an employer-sponsored retirement plan. As an employee, you decide how much of your paycheck is contributed to the plan each month. Any contributions you make are deducted on a pretax basis.
You are only taxed when you withdraw money from the plan. The employer is responsible for administering a 401(k) in accordance with all associated financial rules and regulations.
What is a 403(b)?
Like the 401(k), a 403(b) is a tax-deferred retirement plan. Unlike the 401(k), a 403(b) is only available to employees in nonprofit organizations and tax-exempt groups such as churches, ministries, hospitals, and public schools, as well as some government bodies.
A 403(b) is exempt from the administrative requirements of the Employee Retirement Income Security Act (ERISA), which reduces administrative costs and makes it easier for nonprofit organizations to help employees save for retirement.
The IRS sets a yearly employer contribution limit of $19,000 for 401(k) and 403(b) plans. Both 401(k) and 403(b) plans allow employees to make “catch-up” contributions after age 50. The annual catch-up contribution is $6,000.
If a 403(b) or 401(k) plan allows, an employee who has worked at the organization for 15 years or more may make additional contributions of up to $3,000 for five years.
Advantages and disadvantages
The two plans are well matched in all but a few areas. Nonprofit, religious, and government agencies can choose to offer both 401(k) and 403(b) plans to employees. Private corporations, in contrast, cannot offer 403(b) plans.
Employers can opt to match employee contributions to a 403(b) just as they can with a 401(k). If they do, however, the plan may become subject to ERISA requirements, so this rarely happens. Freeing a 403(b) plan from ERISA requirements may reduce the plan’s administrative costs, but this also means a 403(b) is subject to less protection and safeguards than a 401(k).
The bottom line
Ultimately, whether you choose a 401(k) or 403(b) likely depends on which plan your company offers. However, remember that your retirement savings options are not as simple as just choosing a 403(b) vs. a 401(k). Other types of retirement plan are equally important. Learn more here!