Difference Between 401K and 403B Retirement Plans (With Table)

Employer-sponsored retirement plans such as 401K and 403B are both tax-advantaged. The 401K and 403B account plans are called after the portions of the IRS statute that explain their structure.

Both programs encourage employer-employee payments, and there is the option to withdraw funds before reaching the age of 59 12; however, there are restrictions.

401K vs 403B Retirement Plans

The main difference between 401K and 403B is that Only if you work for a non-profit institution such as a hospital or an educational institute then only you can  use 403b. A 401k retirement plan, on the other hand, is available to all employees whose company is profitable and comes with its own set of benefits.

A 401(k) retirement plan is a donation made by both the company and the employee to a non-profit organisation in order to save a significant amount of money for retirement. The revenue act of 1978, which allows for the 401k retirement plan, was passed in 1978.

This plan permits contributions from the employee’s salary (which is deducted by the employer prior to taxation, allowing for tax deferral) as well as the employer’s contribution.

Staff working at non-profit organisations, such as tax-exempt organisations, public schools, hospitals, self-employed preachers, and church employees, can participate in a 403b retirement plan.

The employer and the employee come to an agreement on the amount of money that will be withheld from the salary before taxes, which must not exceed $18,500.

Comparison Table of 401K and 403B Retirement Plans

Parameter of Comparison
401K Retirement Plan
403B Retirement Plan
DefinitionA 401k Retirement Plan is a post-tax or pre-tax retirement plan in which an employee can make tax-deferred deposits from their annual earnings.The 403b Retirement Plan is a fairly specialised plan that is only available to employees of nonprofit organisations such as schools, government agencies, and hospitals.
ParticipantsEmployee or regular pay earner on a daily basis.Teachers, doctors, government employees, nurses, and other professionals fall into this category.
Institution TypeAny prosperous company or institution is permitted to offer this perk to its employees.Employees of non-profit businesses or institutions are eligible to participate in this programme.
Employer Match RateIn comparison, the 401k retirement plan offers much larger employer match rates.Despite the institution’s legal rights to allow employees to match with each other, match rates are rather low. As a result, the employees are not affected by the ERISA exception.
Program AdministratorsMost mutual fund companies operate the 401k retirement plan.Various insurance firms oversee and administer the 403b retirement plan.
Limits for Investment OptionsMany mutual fund investment options are limited in the 401k retirement plan.Majorly diverse annuity alternatives limit the 403b retirement plan.

What is 401K Retirement Plan?

For-profit businesses can offer 401(k) plans to its employees, which allow them to make tax-deferred contributions to their retirement accounts. Employees can contribute pre-tax or post-tax up to a contribution ceiling amount set by the IRS each year. Employees under the age of 50 will be able to earn up to $20,500 in 2022. Employees aged 50 and up can contribute an additional $6,500 as a catch-up contribution.

Employers can contribute to their employees’ 401(k) plans and add options, but they are not compelled to do so. Matching donations, non-elective contributions, and profit-sharing features are among these alternatives. Employers may make contributions to encourage employees to stay with a company for a long time.

They also get a tax break for their contributions to your account because 401(k)s are considered “qualified plans” by the IRS. Employers can also allow their employees to borrow from their own 401(k)s up to the lesser of 50% of their account balance or $50,000, as long as the loan is paid back within five years. By 1983, about half of all employers in the United States offered 401(k) plans to its employees, and 401(k) accounts now total over $4.8 trillion.

What is 403B Retirement plan?

A 403(b) plan is fairly similar to a 401(k) plan in terms of how it works. These plans are available through public schools, 501(c)(3) tax-exempt organisations, and qualified clergy. Annuities and mutual funds are among the options available to participants.

You can make tax-deferred contributions which in most cases have the same cap as 401(k)s and withdraw money under the same regulations if you have a 403(b).

The vesting periods, or the times during which you do not fully own employer contributions to your account, are often shorter in 403(b) plans. Many plans feature quick vesting as well.

In certain instances, the Maximum Allowable Contribution (MAC) rule allows employees with 403(b) plans to make an additional contribution. You may be able to donate an extra $3,000 if you work for a “qualified organisation” for 15 years. Although the IRS allows for it, your employer may not.

Main Differences Between 401K and 403B Retirement Plans

  1. Stocks, bonds, money market funds, and other investment alternatives are available in a 401K, whereas mutual funds and annuities are only available in a 403b.
  2. When compared to a 401k plan, a 403b plan has less government regulation.
  3. In addition to the $19000 contribution limit that applies to both plans, eligible 403b members can contribute an additional $3000 if they have worked for the same company for more than 15 years.
  4. Because a 403b plan requires all of the high-cost alternatives, the fees are lower in comparison to 401k programmes.
  5. Employees working for profit organisations have a 401k retirement plan, while employees working for non-profit organisations have a 403b retirement plan.

Conclusion

Both retirement plans are governed by the Internal Revenue Service, or IRS and roth contributions are allowed in both 401k and 403b plans.

The maximum sum for an employer-employee agreement is $18,500, with a maximum supplementary amount of $55,000.
Savings can be withdrawn from both plans starting at age 59 12; however, savings can also be withdrawn in the event of financial incapacity or medical attention.

The 401k retirement plan is only available to employees of for-profit businesses, whereas the 403b retirement plan is only available to employees of non-profit businesses.
The 15-year rule of service is only for 403b members, while the non-discrimination test is only for 401k participants.

References

  1. https://link.springer.com/chapter/10.1007/978-3-319-51397-3_8
  2. https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1755-053X.2007.tb00088.x