While I am pretty sure that most of you have a handful of information about the 401k retirement plan but not many of you will be aware of the 403b retirement plan.
A
403b retirement plan is a tax-deferred retirement scheme that allows you to
save some pretax dollars up to $16,500 per year, from your annual wage.
In case, if you have chosen some mutual funds and annuities as your money for investment then the 403b plan is monitored by the wealth management company chosen by the organization you work for.
401K vs 403B Retirement Plans
The main difference between 401K and 403B retirement plans is that 403b is executable only if you are a part of any non-profitable organization like a hospital or an educational institute. However, a 401k retirement plan is applicable to all the employees whose organization is profitable and has its own set of advantages.
Comparison Table Between 401K and 403B (in Tabular Form)
What is 401K?
A
401k is a tax-deferred retirement plan that gives the employees of any
organization to save and invest their pretax money based on the sponsorship
from the employer.
As per the IRS guidelines, and the maximum limit, the employee can decide how much money they want to deduct from their wages and contribute to the 401k retirement plan.
However,
you are never forced to follow the scheme as it is completely optional. It is
completely up to the plan sponsor that is your employee to plan the retirement
scheme as per the rules and guidelines of the government.
Thus
they should be well aware of the following concepts before planning;
- What is the maximum limit for Retirement plan 401k?
- What is the age limit for the plan?
- What are the minimum and maximum tax deduction they can avail?
- What is the investment relocation option they could get from this scheme?
The
various investment options that the employee will have under this plan are;
- Exchange-traded funds (ETFs)
- Cash Alternatives
- Different Investment Vehicles
Also,
we must make you understand that this is not by any case your savings account.
A 401k is just a retirement plan that is not easily accessible in case of
sudden urgency or emergency.
Therefore, it is equally important to have your savings in place for difficult times and plan your “Summary Plan Description” separately for the 401k investment scheme.
Thus,
employees should understand that by contributing their part of wages towards
the 401k retirement plan they are saving their pre-tax income and amount of tax-deductible.
What is 403B?
A 403b retirement is an annuity plan that is tax shredded for employees of any nonprofit organization including schools, medical institutions, and hospitals.
In
this plan either the employer can contribute on behalf of the employees or the
employee may decide to contribute on their own, some part of their taxable
income.
As per the government guidelines all the employees who come under Code Section 501(c)(3) tax-exempt organizations, are eligible to apply for a 403b retirement plan.
The
major benefit of this plan is that it is pretax i.e. the amount you put in 403b
retirement plan will not be taxed by the government.
The
various employees that can avail the benefits of this plan are;
- Doctors
- Teachers
- Nurses
- Government employees etc.
As
per the plan termination guidelines mentioned by the state government, one can
easily terminate the plan as per their convenience.
Thus, employees should comprehend that by subsidizing their part of wages towards the 403b retirement plan they are saving their pre-tax income and amount of tax-deductible anyhow in any case possible.
Main Differences Between 401K and 403B]
Although
both are methods of pre-tax savings, there exists a lot of difference between
401k and 403b retirement plans when it comes to participating audience and
guidelines.
- 401K offers more investment options like stocks, bonds, money market funds, etc. and 403b just offers mutual fund and annuities investment options.
- 403b has relatively less government regulation when compared to a 401k plan.
- In addition to the $19000 contribution limit which is same for both plans, the eligible participants of 403b can contribute extra $3000 if they have been working in one single organization for more than 15 years.
- 403b plan requires all the high-cost options and therefore the fees are less in case of 401k plans comparatively.
Conclusion
It doesn’t matter which retirement plan you choose; what matters is you start with at least one of them. It is really critical to have an idea of all the expenses and costs that are involved in the overall plan.
Thus, be an informed person before investing your money in any of the opportunities available to you.
Also, remember that if there is an employer match option available then it is a SMART choice, even to opt for an expensive plan.
But
all in all both 401k and 403b retirement plans are great tools for pre-tax
saving and investment.
References
- https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-403b-tax-sheltered-annuity-plans
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1937795