401(k) and 403(b) plans are both retirement savings plans offered by employers. They are similar in many ways, but there are some key differences. 401(k) plans are offered by for-profit companies, while 403(b) plans are offered by non-profit organizations and public schools. 401(k) plans have higher contribution limits than 403(b) plans. However, 403(b) plans offer a wider range of investment options. Both plans offer tax-deferred growth, meaning that you don’t pay taxes on your earnings until you withdraw the money in retirement. 401(k) plans are more common, but 403(b) plans may be a better option for employees of non-profit organizations or public schools.
Limits of 401(k) Contributions
The contribution limits for 401(k) plans are set by the IRS and are adjusted annually for inflation. For 2021, the contribution limits are as follows:
- Employee elective deferrals: $19,500 (plus a catch-up contribution limit of $6,500 for participants age 50 or older)
- Employer matching contributions: 100% of employee elective deferrals, up to the annual limit of $58,000 (including employee elective deferrals)
- Total contributions (employee elective deferrals plus employer matching contributions): $58,000 (plus a catch-up contribution limit of $6,500 for participants age 50 or older)
It’s important to note that these limits apply to both traditional and Roth 401(k) plans. Additionally, there are special rules for highly compensated employees (HCEs) and key employees. HCEs are generally defined as employees who earn more than $130,000 in 2021. Key employees are generally defined as employees who are officers of the company or who have significant management responsibilities.
For HCEs and key employees, the annual contribution limit for employee elective deferrals is reduced by the amount of their employer matching contributions. This is known as the “ADP test.” The ADP test is designed to ensure that HCEs and key employees do not receive a disproportionate share of the employer’s retirement plan contributions.
| Contribution Type | Annual Limit for 2021 |
|---|---|
| Employee elective deferrals | $19,500 |
| Employer matching contributions | 100% of employee elective deferrals, up to $58,000 |
| Total contributions | $58,000 |
The Benefits of Roth 403(b) Contributions
Roth 403(b) contributions offer several advantages that can make them a valuable part of your retirement savings strategy.
- Tax-free withdrawals: Unlike traditional 403(b) contributions, which are taxed when you withdraw them in retirement, Roth 403(b) contributions are taxed upfront. This means that you can withdraw your money tax-free in retirement, potentially saving you a significant amount of money over time.
- No required minimum distributions: Traditional 403(b) accounts require you to start taking minimum distributions at age 72. This can force you to withdraw more money than you need, and it can also result in higher taxes. Roth 403(b) accounts do not have this requirement, so you can let your money grow tax-free for as long as you need it.
- Catch-up contributions: Workers who are age 50 or older can make additional catch-up contributions to their Roth 403(b) accounts. This can help you to save more for retirement and reach your goals faster.
To be eligible to make Roth 403(b) contributions, you must meet certain income requirements. For 2023, the income limits are as follows:
| Filing Status | Income Limit |
|---|---|
| Single | $138,000 |
| Married filing jointly | $218,000 |
| Married filing separately | $109,000 |
| Head of household | $194,000 |
## 401(k) vs. 403(b): Understanding the Key Differences
### Eligibility and Contributions
– **401(k):** Available to employees of for-profit companies
– **403(b):** Available to employees of public schools, certain tax-exempt organizations, and churches
### Employer Matching Options
– Both 401(k) and 403(b) plans allow employers to contribute matching funds to their employees’ accounts.
– The matching percentage can vary depending on the plan and employer policies.
– A higher matching percentage can significantly boost retirement savings.
### Investment Options
– Both plans offer a wide range of investment options, including stocks, bonds, mutual funds, and target-date funds.
– The investment options available may vary depending on the plan and provider.
### Contribution Limits
– For 2023, the contribution limit for 401(k) plans is $22,500 ($30,000 for those age 50 or older).
– For 403(b) plans, the contribution limit is $23,000 ($33,000 for those age 50 or older).
### Taxation
– Both plans allow for pre-tax contributions, meaning contributions are made before federal income taxes are deducted.
– Withdrawals from the accounts are taxed as ordinary income.
– 403(b) plans offer an additional tax advantage for employees of public schools and certain non-profit organizations.
### Participant Eligibility
– 401(k) plans: Open to all employees who meet the eligibility requirements set by the employer
– 403(b) plans: Open to employees who meet the eligibility requirements set by the employer and are actively employed by the sponsoring organization
### Withdrawals
– Withdrawals from both plans are generally subject to income taxes and may be subject to penalties.
– 401(k) plans typically allow for loans to participants, while 403(b) plans do not.
### Plan Features
– Both plans offer a variety of features, such as automatic enrollment, investment advice, and educational materials.
– The specific features available may vary depending on the plan and provider.
### Choosing the Right Plan
The best plan for you depends on your individual circumstances and financial goals. Consider factors such as your employer’s matching options, the investment options available, the contribution limits, and your tax situation.
Which is Better 401k or 403b
401(k) and 403(b) plans are both retirement savings plans that offer tax advantages. However, there are some key differences between the two plans.
Contribution Limits
The annual contribution limit for 401(k) plans is $20,500 in 2023, up from $19,500 in 2022. The limit for 403(b) plans is $22,500 in 2023, up from $20,500 in 2022. Both limits are indexed for inflation annually.
Eligibility
401(k) plans are available to employees of for-profit companies. 403(b) plans are available to employees of public schools and certain other qualifying organizations.
Vesting
Vesting refers to the process of gaining ownership of employer contributions to a retirement plan. In a 401(k) plan, you are immediately vested in your own contributions, but you may not be immediately vested in your employer’s contributions. In a 403(b) plan, you are always immediately vested in both your own contributions and your employer’s contributions.
Investment Menu
The investment menu of a 401(k) or 403(b) plan is determined by the plan sponsor. This means that the specific investments that you can choose from will vary depending on the plan that you are enrolled in.
- 401(k) plans typically offer a wider range of investment options than 403(b) plans.
- 403(b) plans may offer more specialized investment options, such as those that are designed to meet the needs of public school employees.
Loans
401(k) plans allow you to take out a loan from your account balance. 403(b) plans do not allow you to take out a loan.
Withdrawals
You can make withdrawals from your 401(k) or 403(b) account at any time. However, you will have to pay taxes on the amount that you withdraw if you are under age 59½.
Which Plan is Right for You?
The best retirement plan for you will depend on your individual circumstances. If you are eligible for both a 401(k) and a 403(b) plan, you should compare the features of each plan to see which one is right for you.
| Feature | 401(k) | 403(b) |
|---|---|---|
| Contribution limits | $20,500 in 2023, up from $19,500 in 2022 | $22,500 in 2023, up from $20,500 in 2022 |
| Eligibility | Employees of for-profit companies | Employees of public schools and certain other qualifying organizations |
| Vesting | Immediately vested in your own contributions, but may not be immediately vested in your employer’s contributions | Always immediately vested in both your own contributions and your employer’s contributions |
| Investment menu | Typically offers a wider range of investment options | May offer more specialized investment options |
| Loans | Yes | No |
| Withdrawals | Can make withdrawals at any time, but will have to pay taxes on the amount withdrawn if under age 59½ | Can make withdrawals at any time, but will have to pay taxes on the amount withdrawn if under age 59½ |
Alright folks, that’s the lowdown on 401k vs. 403b. Which one is right for you depends on your specific situation, but these are the key differences to keep in mind. Thanks for hanging out with me today, and be sure to stop back later for more financial wisdom. Until next time!