An Overview of 401(k) and 403(b) Plans

By Paul Haarman

If you are looking for tax benefits for your retirement accounts, plans 401(k) and 403(b) can seem to be the right option. They derive their name from specific tax codes. 401(k) and 403(b) plans have some similarities and a few differences. For example, 401(k) is for people serving for-profit organizations. Simultaneously, Paul Haarman explains the other one is accessible to public school staff, individuals on specific ministerial posts, and professionals working in nonprofit companies or places that don’t need to pay taxes. Here is a quick comparative study of these two to help you choose a suitable retirement plan.

The standard features of 401(k) and 403(b) 

When you talk about similarities between the two, you should assess contribution limits, availability of loans, penalties, and other aspects. The good news is some 401(k) or 403(b) plans allow you to obtain loans, which you can repay over a period. With traditional plans, you can expect tax benefits on your income for one year. However, taxes may apply to the amount you receive from your retirement account. Then, whether it is a 401(k) or a 403(b) plan, an individual under age 50 can contribute up to $19,500. However, older adults can invest an extra $6,500 in their retirement savings contribution that you can refer to as catch-up contributions.

If you choose either of them as Roth accounts, the first-year contributions will be taxable, and then the amount would grow tax-free. Paul Haarman tells people to be smart with their retirement savings and avoid penalties as much as possible. For instance, if you withdraw money from any of these accounts before maturity, you may have to pay a 10% penalty. As for the Required Minimum Distributions (RMDs), you should start receiving money from your account when you turn 70 ½ or 72 per the rules applicable for a calendar year.

The differences between 401(k) and 403(b)

As already hinted, the eligibility criteria for these plans are different. Public and nonprofit employees can open a 403(b) account, and those who work in for-profit companies can join 401(k)s. With a 401(k), you can select from a range of exchange-traded funds (ETFs) and mutual funds offered by your employer. With the other plan, you now get an option for mutual funds also in addition to annuities.

Paul Haarman adds that these plans also differ in the context of catch-up contributions. While the

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