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What’s The Difference Between a 401(k) and 403b?

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It is never too early to plan for retirement.

As a matter of fact, since the average age of retirement is 66 in the US, it is not bizzare to start planning even if you are in your early twenties.

Think about it - if you are 25 years old right now, you have less than double the number of years you have already lived life to reach retirement.

Those 41 years will come by really quickly!

So where do you start?

403b vs. 401k: What's The Difference?

For most working adults in the US, the plan to retire with financial stability usually starts with a 401K plan that you contribute to and can roll-over when you switch jobs.

But is that all there is? 

In today’s post, we will compare and contrast the popular 401k retirement plan with its’ lesser known cousin but equally important cousin, the 403b plan.

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403b vs. 401k: What's The Difference?

The 401k plan is a retirement plan offered to employees of for-profit organizations.

On the other hand, the 403b plan is the retirement plan that is offered to employees of tax-exempt/not-for-profit organizations like public schools, certain churches and hospitals.

There are a few similarities between the two plans.

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    Both retirement plans have limits on how much you can contribute

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    Since they are retirement plans and not savings accounts, you cannot easily withdraw money from it and in the rare occasion that you do, you will be taxed on the money you withdrew.
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    With both plans, your employer will match your contributions.
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    For both plans, you will pay if you withdraw money from the account before the age 59.5
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    In case of an emergency, you can take out money from either account but you will have to pay it back if you want to avoid significant tax consequences.
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    Compensation and contribution limits are subject to annual-cost-living adjustments.
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    With both plans you can start withdrawing regularly from your account after age 59.5 without any tax implications.
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    With both plans, at age 70 you are required by the government to receive monthly payments from your 401k or 403b plan or face severe tax consequences.

That is where the similarities between a 401k plan and a 403b plan end.

Differences

By nature of who provides it (tax-exempt organizations), the 403b  plan requires lower administrative costs.

Secondly, the contribution limits work differently for the 403b plan as compared to the 401k.

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    There is the basic contribution of $18,000 per year for all employees.

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    Employees 50 years and older can opt to contribute an additional $6,000 per year if they want to play catch up bringing the total amount to $24,000 per year.

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    In addition, there is an IRS rule called the “15-year rule”. According to this rule, if an employee has worked with the same eligible 403b employer for 15 years, an additional $3,000 can be contributed to the retirement plan.

The 403b plan also comes with limited investment choices. However, it does not mean, it is less powerful than the 401k plan.

The most important thing is that you are actively contributing to it.

On the other hand, the 401k plan has higher administrative costs for your employer.

Unlike the 403b plan, you will have access to number of investment options.

There is no “15-year-rule” with the 401k.

The only contributions that can be made are the first $18,000 and the additional “catch up” $6,000 for individuals over the age of 50 years.

Although rare, some 401K plans will require that your contributions are stopped for the year once your salary reaches $270,000 for the year.

In this instance, even if you have not reached the $18,000 contribution to your 401K for the year,  as long as you have received $270,000 in compensation , you still will not be able to put money into your 401K account until the following year.

I Have A 403B Or 401K Plan. How Else Can I Save For Retirement?

Like I mentioned at the beginning of this post, saving up for retirement is not some far-away luxury.

And as you can see, saving up to $24000-$27,000 per year ($48,000-$54,000 when matched by your employer) may not be enough to support you during retirement.

On top of that, if you encounter an emergency and try to take money out of either account, you face the possibility of being taxed heavily.

This is why it is best to also be putting some money in other types of savings accounts.

A Roth IRA is a good place to start.

You may also want to consider high-yielding savings account or even decide to invest some money in the stock market on your own.

The idea here is that it is never a good idea to put all your eggs into one basket.

Closing Thoughts

Which of these - 401k or 403b - do you participate in?

If you are older, what has your experience been?

Your thoughts are welcome in the comments.

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