Can you enroll in both 401(k) and 403(b) retirement plans?

Paul Haarman

By  Paul Haarman

Are you looking for ways to boost your retirement savings? If you work at a place where you get both 403(b) and 401(k) plans to contribute, you can expect to achieve your goal. However, there would be a combined contribution limit that you would need to stick to for a tax year. In 2020, you can contribute $19,500 from your income. And if you are more than 50 years of age, you can make a catch-up contribution of $6,500. These limits are valid for individual plans also. Paul Haarman explains that means you can use both these accounts to save for your future. It is just that the contributions will have a cap.

An overview of a 401(k) and a 403(b) plan

403(b) plan is mainly for nonprofit company employees working for a public school, religious group, or an organization that qualifies for tax exemption. You pay before-tax dollars towards contributions, and this amount comes from your salary. For this, the option of an employer match can be available. As far as employee contribution goes, you would have choices for investing your money. This plan can feel similar to 401(k) to an employee. But there are differences. You can open a 403(b) account with an insurance company, while the other is commonly accessible with a mutual fund company.

Paul Haarman says nobody can deny that both these accounts can be accessible only to some people.

401(k) plan’s popularity is because of its generous employer match feature. Since large companies can afford larger sums in benefits, they offer this choice. For a charitable or nonprofit organization, it cannot be possible. Besides, a 403(b) plan provides lesser investment opportunities as provided by the employer. 

Differences between the two retirement plans

Paul Haarman points out that you can find one distinct from the other when it comes to withdrawal. If you know, you have to be at least 59½ years old to withdraw your savings from these accounts to avoid a 10% penalty for early withdrawals. During the COVID-19 situation, the penalties have relaxed. Those who withdraw funds due to financial hardships caused by COVID-19 under the CARES Act don’t have to pay penalty charges. The acronym CARES stands for Coronavirus Aid, Relief, and Economic Security. Still, 403(b) account holders have the upper hand here. They can opt for early distribution without penalty when they leave their employer.  

No such severance facility is available to a 401(k) plan holder. They cannot take a distribution before the age of 55.

As Paul Haarman informs, both the distributions are taxable, though.

Furthermore, another difference lies in the area of catch-up provision. 403b plan has a unique catch-up advantage for employees working for more than 15 years with a company. The benefit would be available if the employer also agrees to the option. 

In essence, whether you have a 401(k) or a 403(b) plan or both, you should study them thoroughly to understand their limitations and retirement benefits. These can give you an insight into how your future financial health is shaping up.

Paul Haarman