What’s the difference between 401k & 403b retirement plans?
Looking to invest in your retirement? Know the difference between a 401k and a 403b plan.
Congratulations. You’re at the point in your career when you can start to set aside some funds for your retirement. This is an exciting time, and it means your income has reached a point where you can work beyond covering just your basic bills.
There are lots of benefits to funding your nest egg as early as possible. There’s the benefit of compounded interest over time, as well as the fact that once you make savings a habit it becomes even easier to do. Then, when you’re at retirement age, you can step back from your work and enjoy your life. No problem.
If you work for an employer who helps you with your retirement, you’re likely going to be offered one of two tax-advantaged investment plans. These are a 401k and a 403b. While these options are similar, they’re not exactly alike. Understanding the differences can help you to make the most out of whatever you’re able to save for retirement.
The most basic difference: Know the kinds of companies that can offer each plan
403b plans are structured so that the organizations which offer them are exempt from certain kinds of administrative processes and costs.
The most basic difference between the two types of plans is pretty simple. Generally speaking, 401ks are offered by for-profit organizations. From small businesses to larger corporations, if a company makes a profit they’re going to be using a 401k plan. It is so common, in fact, that it is the kind of plan that most individuals are familiar with when they think about employer-sponsored retirement plans.
403b plans are offered by organizations that don’t exist to make a profit. These include schools, charities, religious organizations, and schools. These plans are structured so that the organizations which offer them are exempt from certain kinds of administrative processes and costs. The structure makes it easier for them to help their employees in the same way that a for-profit company would be able to.
Employee contributions under each plan
In both plans, the amount of money that an employee is eligible to contribute is similar if not the same. The money in both is contributed on a pre-tax basis. That means that based on how you invested it, you may need to pay taxes when the time comes for you to use your nest egg.
In addition, with both plans, employees can increase the number of their contributions once they reach a certain age. For 403b plans, this factor may have more restrictions than for its counterpart. In addition, you also can’t withdraw your contributions prior to a certain age, but you need to start to withdraw your contributions if you reach 72.
In both plans, your contribution may be able to be matched by your employer. The details of this match vary from company to company. Regardless, some employers are able to contribute to a retirement fund regardless of whether their employee sets aside funds. Others may require employees to make a small contribution and then match that. In most cases.
Keep in mind that in both plans, matches are capped at a certain percentage of an employee’s income Employees are welcomed to contribute more money after that fact until they reach a yearly contribution limit, which is defined by the government. After this point, employees have “maxed out” their contribution and need to move on to another vehicle.
Investment options and costs
If you want to more fully understand what your plans may be costing you, there’s a way to do it. There are online calculators that can help you to understand your fees and evaluate other plan components.
Because of how each plan is managed, Investment options may vary. The quality and variety of these options are related to the type of brokerage house an employer selects rather than the plans themselves.
Many non-profit organizations that are using 403b plans work with brokers that have lower costs and fewer fees. They also may restrict investment options, which lowers their costs as an organization and lowers the cost to their employee.
For-profit companies may offer a wider variety of investment options for employee plans, but take care to understand any fee structures that are associated with them. In some cases, the variety and choice may benefit you. In other cases, bigger isn’t always better.
If you want to more fully understand what your plans may be costing you, there’s a way to do it. Online calculators can help you to understand your fees and evaluate other components of your employer-sponsored retirement options.
Take care when deciding which one you choose. They each work a little bit differently and one may be more comfortable, and clear, for you than others. Play around with them a bit and experiment with putting some of the information in so you can see what you think.
As you might expect, there’s a shortlist of other less prominent differences between the two plans. One of these seems obvious in hindsight: 401ks can contain profit-sharing components while 403bs can’t. The reason for this is pretty simple. Companies that would use a 403b aren’t designed to make a profit by their very nature. There’s nothing for employees to share in.
Another difference between the two plans is that 403b companies may be effectively discouraged from contributing to employee match programs. That’s because if these organizations do, they lose a key exemption which makes covering a match even more expensive. For non-profit organizations that operate on a small budget, this exemption loss can be meaningful.
Still not sure how to work with both plans? Hire a pro.
If you’re not sure what you’re doing, you may want to hire an investment professional to help. They understand how the funds, and the associated fees, work.
Planning for retirement, no matter what kind of plan you’re using, can be overwhelming. There are a lot of options connected to the types of plans offered. In addition, there are a number of choices available within each plan. Having the knowledge about what you’re doing is key to making the most of the money that you invest.
If you’re not sure what you’re doing, you may want to hire an investment professional to help. They understand how the funds, and the associated fees, work. They can help you make selections that make sense so that you’re prepared for the day that you want to leave work. The money they can save you might more than compensate for the cost you’ve invested in hiring them.
Consider hiring a financial planner
In addition to hiring an investment advisor, you may also want to look into working with a financial advisor. They can help you understand how your current income will help you to meet your overall goals. They may also be able to help you establish, and stick with, a budget. In addition, if you’re not saving enough for retirement, they may be able to help you stretch your income so that you can make that longer-term investment.
The right financial advisor can help you plan for things outside of retirement. He or she can also help you work towards larger life goals including buying a house, education for yourself or your dependents, a second home, or any luxuries and hobbies you may have.
Going a step further, if your married or have a partner, they can help ensure that the two of you are on the same page when it comes to making financial decisions. No, they can’t communicate for you, but they can help you understand what you’re talking about.
Putting it all together
At the end of the day, your financial life for the long term is as important as making sure your bills are paid each month and the basics are covered. Having an understanding of your retirement funds is a key part of this. It’s worthwhile to take the time to get to know what’s available to you and to consider how your options fit in with your goals. As you do that, you’ll start to see what you need and to make good choices that allow you to enjoy your working life and to retire when you’re ready.
The future is what you make it, and planning well can be a great help.
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