401k vs 403b: Finding the Right Plan for You
Depending on how your organization operates, you may require a specific retirement plan for your workforce. Oftentimes, these plans are set as either a 401(k) or 403(b) retirement plan. From non-for-profit entities to community/governmental institutions, each company may need to choose which plan is right for them. So, how can you choose? What’s the difference between 401(k) vs 403(b) plans? Let’s explore what makes these plans unique.
Overview: 401k and 403b
When comparing 401k vs 403b retirement plans, there are quite a few similarities that make it hard to choose between the two.
Both 401(k) and 403(b) are employer-sponsored plans that offer two forms of deferral contributions, tax-deferred and Roth accounts. These plans also share certain restrictions, such as:
Contribution Limits: Both 401(k) and 403(b) plans have the same annual contribution limits. The IRS limits contributions for both 403(b) and 401(k) plans to $22,500/year, with catch-up contributions for those aged 50 and over increasing by an additional $7,500. Individual contribution can’t exceed 100% of your compensation.
Employer Contributions: Between 401(k) vs 403(b) plans, both allow employers to match or make contributions up to a certain percentage for eligible employees.
Age Restrictions: As with most retirement plans, there are penalties involved with early withdrawal for 401(k) and 403(b) plans. For either plan type, participants must wait until age 59½ to withdraw retirement savings, or potentially incur a 10% tax penalty on top of paying state and federal taxes on the withdrawal.
Distribution Limits: In 401(k) and 403(b) plans, plan participant funds must be distributed or start withdrawing by age 73.
401k vs 403b: What’s the Difference?
Though there are similarities, selecting a 401(k) vs 403(b) retirement plan comes down to each plan’s availability, restrictions, and options for employers or employees. Here are some differences to consider when choosing either 401(k) vs 403(b) plans:
401(k) plans are commonly used by for-profit businesses. Though similar, 403(b) plans are only available to tax-exempt corporations—meaning non-profit or governmental institutions like hospitals, schools, universities, churches, or charities.
Though the investments employers offer vary, generally, 401(k) plans allow employees to select investments in mutual funds, company stock shares, or bonds. Unlike 401(k)s, though, 403(b) plans typically only allow participants to invest in mutual funds and annuities.
Between these two types of plans, employer contributions are equal in terms of the limits and contributions allowed. Though 401(k) and 403(b) retirement plans can include matching contributions, ERISA regulations on reporting and fiduciary requirements cause some employers using 403(b)s to withhold from matching to avoid excessive compliance costs. 403(b)s are exempt from these regulations as long as non-profit employers do not fund contributions to eligible employees.
Additional Catch-up Contributions in 403(b) Plans
Overall, individual contribution limits are set the same for both types of plans. However, comparing 401(k) vs 403(b), employers using 403(b) plans may permit workers employed in the same company for at least 15 years to contribute an additional $3,000 to their plan per year up to a $15,000 limit as a special catch-up contribution.
To restrict and monitor the contributions certain employees make, all 401(k) plans are subject to annual non-discrimination testing. For 403(b) plans, the regulation varies: if they include matching contributions, employers are bound by ERISA guidelines to do the tests; if they do not match contributions, 403(b)s are exempt from certain non-discrimination testing but must allow all participants the universal ability to participate immediately upon being hired.
Select Your Retirement Plan with RPCSI
When deciding between 401(k) vs 403(b) plans, it all comes down to your type of organization. From Roth options to contribution limits, let the experts at RPCSI help you create the right plan today! Contact RPCSI to learn more.