What’s the difference between 401(k) and 403(b)?
It sounds like the start of a bad joke: “Two retirement accounts walk into a bar, and one says to the other…” But it’s not a joke. It’s not overly serious either, but it’s a real question – what is the difference between a 401(k) and a 403(b). The answer?
401(k) and 403(b) plans are nearly identical. How close to identical are they? Here are the key factors they share:
- Both allow for tax-deferred contributions that permit you to receive a tax deduction in the year you contribute to the plan for the amount you put into it
- Both allow for up to $19,500 in contributions per year in 2020, with a $6,000 extra catch-up provision for employees age 50 and over
- Both of them will require you to pay a 10% withdrawal penalty in addition to any tax if you withdraw funds prior to age 59.5
- Both allow for loans to be taken against active plans that must be paid back within 5 years if you are still active in the plan, and within 60 days if you leave that employer
- Both allow employers to offer matching contributions
- Both require you to begin withdrawing required minimum distributions (RMDs) at age 70.5 if you are no longer an active employee at the company
- Both allow you to roll the account over to a Traditional IRA or another 401(k) or 403(b) once you leave your employer
- Both allow employers to offer a selection of investment options, ranging from safer strategies based on bonds or fixed accounts to more aggressive strategies based on stocks and other more volatile investments
As you can see, there are an awful lot of similarities. There are a couple key differences though:
- 401(k) plans are offered by for-profit companies, while 403(b) plans are offered by schools, non-profit organizations, and religious institutions
- 403(b) plans may allow for an additional $3,000 in the maximum allowable contribution each year, but only if the employee has been with the company for 15 years or more, and companies are not required to offer this benefit
So there are more similarities than differences when it comes to 401(k) and 403(b) plans.
It’s unlikely you’ll ever have to choose one versus the other unless you are an employer selecting one for your company, simply because most companies offer one retirement plan and it is typically one of these plans that is largely determined by the tax status of the organization. So, thankfully, you didn’t have to put up with any bad jokes (this time), and you now should have a better understanding of the key similarities and differences between the two plans.