It can be difficult to know which kind of retirement savings plan to go with. Everyone you talk to may have different plans, and you’re not sure what the difference is.
It can be even more difficult when one employer only offers one kind of retirement plan and not others. How do you plan accordingly for the future? To make things easier, here are the main differences between a 401(k) and a 403(b).
What Is a 401(K)?
A 401(k) receives its name from the federal tax code that it falls under. It is sponsored by an employer and is funded from deductions made from your payroll while you are working for that employer. Employers will also match at least part of your contributions. It’s always recommended that you contribute the maximum amount matched by your employer.
So how does a 401k vs 403b pan out?
What Is a 403(B)?
A 403(b) is similar to a 401(k), but it takes the forms of annuity contracts or mutual fund custodial accounts. It works exactly the same way, with both you and your employer making contributions to an account to be used for retirement later.
So What’s The Main Difference?
The two kinds of retirement plans seem so similar, but why do they have different names? One main difference is the form the retirement plan takes: 401(k)s are paid into a separate account while 401(b)s are paid into annuity contracts or mutual fund custodial accounts.
Another difference is that 401(k)s are usually provided to employees who work at for-profit organizations, while 401(b)s are provided to employees who work at tax-exempt or not-for-profit organizations, such as schools or hospitals.
Which One is Better?
Neither one is really better than the other. It really depends on the kind of place you’re working for. In one respect, employers are more willing to make frequent matching contributions under 401(k) plans because they can afford it. Both 401(k)s and 403(b)s allow for Roth options, making it easier for you to plan for your future.
If you’re still unsure as to which provides with the better options, it’s a good idea to visit your plan administrator to see which features are offered by either plan.
Rather than focusing on which plan is best for you, it’s more important to consider actually getting started. Spending money as soon as it’s in your account is not the best way to save for the future. Most people consider self-funded IRAs or Roth IRAs instead, but this takes a lot of discipline to start yourself, and it can be difficult to keep track of how much you’re actually putting into retirement each month, especially when those emergency expenses crop up.
It’s better to start too early than to start too late; you may find that you don’t have enough to retire by the time you hit retirement age, and that can leave you in a world of trouble.