403b vs 401k

403b vs 401k- How are they the same?

403b retirement plans are identical in most ways to 401k plans. 403b and 401b plans function by offering to manage the retirement plan for its employees. Employees choose to have a percentage of paycheck deducted before taxes and put into their retirement brokerage account. Your company probably will match the amount you put in in some way. Usually, they will match your 403b or 401k contribution up to a certain percentage. The money is then invested in mutual funds, annuities, REIT's (real estate trusts), or money markets. The retirement account grows tax-free until the employee the money is taken out for retirement. Starting at 59 1/2, you can start to take out money out of your retirement accounts (there are exception when you can take out money earlier).

403b vs 401k- How are they different?

The major difference is that a 403b retirement plan can only be offered by non-profits like schools, hospitals, universities, charities, and research institutes. Since these types of institutions are non-profit, 403b accounts are unable to accept profit sharing or dividends from the brokerage management company (Like Fidelity). Also, the non-profit organization does not have absolute control of the plan. Its only responsibility is to put employees' payroll deductions into the 403b retirement account.

403b vs 401k- So what's the advantage of a 403b over a 401k?

There are two distinct advantages for non-profit institutions. 403b programs have very easy review and certification process since they are exempt from the Employee Retirement Income Security Act. ERISA says that other tax-deferred accounts get a periodic review called discrimination testing. 403b's don't have to worry about any extra accounting and there is next to no administration costs. These cost-savings are generally passed on to the employees, even though they may not see it. 401k plans can charge administration fees, which affects the costs of all participants.

For the employee, there are two big advantages. Number one, the institution's contribution to the 403b retirement account can be taken out without penalty if it invested in an annuity. Since the non-profit organization that matched it does not owe taxes (since they are a non-profit), the US government says these contributions are exempt from tax liability. The 2nd advantage is being to leave the account with a former 403b retirement plan. Since there are no administrative costs for the 403b retirement account, institutions will almost always let them leave the account in place after they leave. This means if you are a teacher who taught at one school and then moved to another, you can keep your 403b retirement plan with them at no additional cost.

So, in most cases, you will be better off with a 403b vs a 401k. However, this doesn't apply in all cases. Your 403b retirement plan may offer limited choices to invest and may not match your investing objectives or offer poor funds that underperform the market. It is always best to sit down with a financial planner or accountant before making any investing decision.