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The Differences Between 401(k) and 403(b) Plans


401(ok) vs. 403(b): An Overview

Named after sections 401(ok) and 403(b) of the tax code, respectively, each 401(ok) plans and 403(b) plans are certified tax-advantaged retirement automobiles provided by employers. The major distinction between the 2 is the kind of employer sponsoring the plans—401(ok) plans are provided by personal, for-profit firms, whereas 403(b) plans are solely accessible to nonprofit organizations and authorities employers. Another key distinction between 403(b) and 401(ok) plans lies within the funding choices every provide, though that distinction lessens over time.

Once also referred to as tax-sheltered annuities, 403(b) plans was restricted to an annuity format. This restriction was eliminated in 1974.

Key Takeaways

  • 401(ok) and 403(b) plans are certified tax-advantaged retirement plans provided by employers to their workers.
  • 401(ok) plans are provided by for-profit firms to eligible workers who contribute pre or post-tax cash by way of payroll deduction.
  • 403(b) plans are provided to workers of non-profit organizations and authorities.
  • 403(b) plans are exempt from nondiscrimination testing, whereas 401(ok) plans are usually not.

401(ok) Plans

403(b) Plans

Legal Differences Between 401(ok) and 403(b) Plans

403(b) plans are unable to simply accept revenue sharing from their sponsor employer. This is sensible as a result of the entities which can be allowed to supply 403(b) plans—nonprofits and the federal government—are usually not working to make a revenue. Also, 403(b) plans don’t have to adjust to most of the laws within the Employee Retirement Income Security Act (ERISA), which governs certified, tax-deferred retirement investments, together with 401(ok)s and 403(b)s. For instance, 403(b)s are exempt from nondiscrimination testing. Done yearly, this testing is designed to forestall management-level or “highly compensated” workers from receiving a disproportionate quantity of advantages from a given plan.

The cause for this and different exemptions is a long-standing Department of Labor regulation, below which 403(b) plans are usually not technically labeled as employer-sponsored so long as the employer doesn’t fund contributions. However, if an employer does contribute to worker 403(b) accounts, they’re topic to the identical ERISA tips and reporting necessities as those that provide 401(ok) plans.

Additionally, funding funds are required to qualify as a registered funding firm below the 1940 Securities and Exchange Act to be included in a 403(b) plan. This shouldn’t be the case for 401(ok) funding choices.

Practical Differences Between 401(ok) and 403(b) Plans

Typically, the plan suppliers and directors are totally different for every sort of plan. 401(ok) plans are typically administered by mutual fund firms, whereas 403(b) plans are extra typically administered by insurance coverage firms. This is one cause why many 403(b) plans restrict funding choices and prominently characteristic annuities, whereas 401(ok) plans have a tendency to supply lots of mutual funds.

For non-ERISA 403(b) plans, expense ratios may be a lot decrease since they’re topic to much less stringent reporting necessities.

Nevertheless, 401(ok) plans and 403(b) plans are very comparable so far as retirement automobiles go. Both have the identical fundamental contribution limits, each provide Roth choices and each require members to succeed in age 59.5 earlier than taking distributions. 

Though it’s not quite common, it’s attainable to have an employer provide each a 401(ok) and a 403(b). In these instances, workers might contribute to each accounts.

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About Amy Harvey

Amy R. Harvey writes forStartUps Sections In AmericaRichest.

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