403b vs. 401k: For most people, retirement accounts are one of the most challenging obstacles to managing their finances. Their names don’t help, like “401k” and “403b.” They feel like a tax or marathon to me.
Today, we will explain these two retirement savings vehicles. Let’s compare 403b vs. 401(k). 401,000 accounts are eligible for each type of account, the difference between 401,000 and 403,000, and instructions on how to invest. I’ll also discuss how to invest if you are not eligible for either account type.
403b vs. 401k: How do these retirement accounts work?
How can the two numerically named accounts compare against each other? We will begin by discussing what is the difference between the 403b and the 454p.
What is a 403b?
A 403b is a tax-advantaged retirement account available to employees of hospitals, schools, nonprofits, and churches. It’s up to the organizations themselves whether they offer one and what specific terms they set. You can invest in mutual funds and annuities using a 403b.
The standard for 403b itemized deductions is $22,500 per year, but those who are already 59 1/2 years old can contribute more to catch up if they have worked less than 10 years. You can make the first withdrawal at age 60 (or younger with a 10% penalty).
Many employers that offer 403b plans sweeten the reward with a match for charitable contributions. This means that they will match how much you’re putting in, depending on your salary.
For instance, an employer might offer a 50-cent-per-dollar match to 6% of your income, so if you earn $50,000 a year and contribute at least $3,000, they will give you another $1,500.
Often, you’ll have a choice between contributing to a traditional 403b or a Roth 403b. Traditional means that your contributions are pre-tax (thus reducing your taxable income), while Roth contributions are taxed upon withdrawal. A Roth option allows you to pay taxes on the money you acquire now and will not be taxed on withdrawals at a later time.
Continue reading this article for a more in-depth comparison of conventional vs. Roth accounts.
What is a 401k?
A 401k is a type of employer-sponsored retirement account available at for-profit companies. You can convert your 401k into a tax-advantaged vehicle for investment in the stock market.
It’s more common than the 403b, but it’s still up to each company whether or not to offer a 401k plan. Small companies have plans, while larger companies may have them, too.
The 401k is similar to the 403b in many ways.
We’ll discuss their differences later.
Investing in a 401k or 403b
When it comes to 403b and 401k accounts, they are both vehicles for investments, not investments themselves.
When you open either account, you will need to make allocations for how to use your money within the fund (aka asset allocation). The exact investment options available to you will depend on your company’s program.
Review your company plan
Only 403b accounts can provide mutual fund and annuity investments, while 401ks can also offer these along with other types of investments such as stocks. It’s not really that important to pick between funds with either of these account types. The 3-fund portfolio is a simple and welldiversified way to invest in various asset types.
If you are interested in annuities, you should be aware of their pros and cons. They can help you reduce your risk in bad markets by offering you a certain amount of recurring income.
Nevertheless, they also come with high brokerage fees and may be difficult to qualify for. Annuities were common at one time, but they aren’t considered to be among the best investment opportunities today.
Speak to an advisor if needed
An expert financial planner can be useful if you are having a hard time choosing which investments to make. However, be careful about paying someone to manage your account since these expenses may be steep. Managing your own portfolio is also very simple if you just pick index funds and leave them alone.
Take any match offered
We previously discussed business matches above. If your company offers a 401k or 403b with matching funds, you should contribute as much as possible in order to receive the full amount. Free money!
Just be aware of the fine print when participating in sporting events: most companies require that you stay with them for a certain length of time in order to earn the full prize. This is called “vesting” and is a way of the business to ensure that they’re ensuring their workers who stay the longest are receiving the greatest return for their time investment.
If you’re 50% vested by the time you leave the company, you’ll get to keep 50% of the company match amount you’ve earned over your tenure. Vesting only affects their contributions, not yours. Learn how vesting works.
The difference between 401k and 403b accounts
Honestly, when it comes to the 403b vs. 401k, there are more similarities than differences. The major difference boils down to who can contribute (what type of organization you work for). If you are employed by a nonprofit, school, or other tax-exempt organization, you will not be eligible for a 403b.
403b accounts are available from smaller companies that offer limited investment options. Those plans may have more expensive premiums since they are often provided by smaller companies with fewer employees. A bonus of 403b accounts is that their vesting tends to be much quicker than with traditional employer-sponsored plans.
Besides that, they’re just different ways of accomplishing the same goal: investing for your retirement with tax benefits and assistance from your employer.
What if you’re not eligible for a 401k or 403b?
Independent workers and small businesses owners are not eligible for either the pension account or the retirement program. Even if you’re an employee of a major company, your employer may not offer a traditional retirement account.
Self-employed people may open an alternative account called a “solo 401k.” Because you count as both employee and employer, you can make contributions to the account on both ends as well.
2023 solo 401k limits are $22,500 as an employee, plus an additional 25% of your income as a contribution from the employer end. Learn more about saving for retirement as an entrepreneur by visiting our page!
For companies that do not have a plan, you can suggest that they implement one. If you’re comfortable approaching a supervisor or HR, it can’t hurt to do some digging and lay out your case.
Consider an IRA
IRAs are another excellent retirement account option since anyone employed (from any source) can open one. However, when you compare an IRA vs. a 401(k), the latter offers additional tax advantages. 403b vs. 401k, IRA contribution limits are the lowest.
In 2023, you can contribute a maximum of $6,500 to a traditional or Roth IRA, as long as you earn that much in taxable income.
View this page to learn about these retirement accounts, 401(k)s, and other savings vehicles.
Now you know the difference between a 403b vs 401k!
Beginning retirement planning early is the best way to establish wealth later in life. Drive as much as you can afford, and start saving as soon as possible. Even though your money will be modest at the start, it will grow over time.