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401K / 403B

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Both 401(k) and 403(b) plans are employer-based defined contribution retirement plans. Most employers offer automatic contributions that deposit a certain percentage of each contributing employee’s paycheck into their retirement account. Employers may choose to match all or part of the employee’s contributions up to a certain percentage of their annual compensation. Employers can also make discretionary contributions that aren’t dependent on the employee’s participation in the plan.

401(k)s and 403(b)s share these attributes:

  1. They are typically tax-deferred. Contributions are made with pretax dollars, which decreases the employee’s taxable income. The money grows without tax until it is withdrawn in retirement, and taxes on withdrawals are paid as ordinary income.
  2. Many employer plans now also offer Roth versions as an option. This allows employees to contribute post-tax dollars to their retirement plan and withdraw the money tax-free in retirement. Designated Roth accounts have different rules and tax benefits than their standard counterparts.
  3. They both have the same annual contribution limits set each year by the federal government. In 2022, the contribution limit for both 403(b) and 401(k) plans was $20,500, or $27,000 if you were age 50 or older. Contributions also cannot exceed 100% of the participant’s compensation.
  4. Participants must wait until 59½ to withdraw money without a penalty. The penalty for early withdrawal is 10%, which you pay in addition to paying state and federal income taxes on the money you withdraw.
  5. Both require participants to begin withdrawing money by age 72. This required minimum distribution is common to both 401(k)s and 403(b)s.

How Are 401(k) and 403(b) Plans Different?

Employer Profile

The main difference between these plans lies in the type of employer behind each plan. For-profit enterprises offer 401(k) plans; government agencies, non-profits, hospitals or churches are likely to offer 403(b)s.

Investment Choice

The investments offered in a 401(k) plan vary from employer to employer, but usually consist of a mix of mutual funds, stocks, bonds and other securities. A 401(k) may also offer shares of company stock. Assets in a 403(b) are generally limited to mutual funds and annuities.

Matching Funds

401(k) accounts are automatically covered by regulations in the Employee Retirement Income Security Act (ERISA), which includes reporting and fiduciary requirements. ERISA applies to 403(b) plans only under certain circumstances, including when employers contribute to their employees’ plans.

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