When planning for retirement, two of the most common savings vehicles are the 401(k) and the 403(b) plans. While both are employer-sponsored retirement accounts, they differ in terms of eligibility, investment options, and benefits. Let’s dive into the key distinctions to help you determine which plan may be right for your financial goals.

What Is a 401(k)?

A 401(k) is a retirement savings plan primarily offered by private-sector employers. It allows employees to contribute a portion of their pre-tax salary to an investment account, reducing taxable income for the year. Many employers also match a percentage of employee contributions, making it an attractive option for building retirement savings.

Key Features of a 401(k):

Eligibility: Typically offered by for-profit companies.
Contribution Limits: For 2024, employees can contribute up to $23,000, with an additional $7,500 catch-up contribution for those aged 50 or older. Learn more about the 2024 contribution limits here.
Investment Options: Wide variety of mutual funds, stocks, bonds, and ETFs.
Employer Match: Many employers offer matching contributions, often ranging from 3% to 6% of your salary.

What Is a 403(b)?

A 403(b) is similar to a 401(k) but is tailored for employees of non-profit organizations, public schools, and some government agencies. Like the 401(k), contributions are tax-deferred, and the funds grow tax-free until withdrawal in retirement.

Key Features of a 403(b):

Eligibility: Available to employees of non-profit organizations and public-sector employers.
Contribution Limits: Identical to 401(k) limits—$23,000 in 2024, with a $7,500 catch-up contribution.
Investment Options: Typically more limited, focusing on annuities and mutual funds.
Unique Benefits: Employees with 15+ years of service at certain organizations may qualify for additional contributions.

Key Differences Between a 401(k) and a 403(b)

Employer Type: 401(k)s are typically used for for-profit companies while 403(b)s are typically used for non-profits and public school systems.
Investment Options: 401(k)s typically have a wide range of investment options with some plans even offering the ability to purchase individual stocks. 401(b)s are typically more limited allowing annuities and some mutual fund options.
Additional Contributions: 401(k)s have a standard catch-up contributions allowing an additional $7,500 in 2024 if you are over the age of 50. 403(b)s sometimes can allow additional contributions for long-serving employees.
Administrative Costs: 401(k)s often have a higher cost due to plan complexity and administration.

Which Plan Should You Choose?

The decision between a 401(k) and a 403(b) often depends on your employer and the plan they offer. If you work in the private sector, a 401(k) is likely your only option. For those in the public or non-profit sectors, a 403(b) may be available. Here are a few considerations:

Employer Match: Check if your employer offers matching contributions, as this can significantly boost your retirement savings.
Investment Options: If having a diverse range of investment choices is important to you, a 401(k) might be more appealing.
Fees: Lower administrative fees in a 403(b) plan can be advantageous, especially for long-term savings.

Maximize Your Retirement Savings

Regardless of the plan you have access to, maximizing contributions and taking advantage of any employer match are key to building a secure retirement. If you’re still unsure about which plan suits your needs, consult a financial advisor for personalized guidance.

Start saving today and take control of your financial future!

FAQs About 401(k) and 403(b)

Can I have both a 401(k) and a 403(b)?

Yes, if you work multiple jobs that offer different plans, you can contribute to both. However, the combined contribution limit remains $23,000 in 2024.

Are 401(k) or 403(b) contributions tax-deductible?

Contributions are pre-tax, which means they reduce your taxable income.

When can I withdraw from these accounts?

You can begin penalty-free withdrawals at age 59½. Early withdrawals may incur a 10% penalty and income tax.

By understanding the differences between 401(k) vs. 403(b) plans, you can make informed decisions that align with your retirement goals.

Source on 401k distribution rules.

Want to learn more about your 401k or 403b?

IntelliVest Wealth Management has helped many people understand their plan documents to make sure they are planning appropriately for their goals. If you are interested in learning more please give us a call for a free consultation. You can contact us here.

Disclosure

IntelliVest Wealth Management is a Registered Investment Advisor Headquartered in Spartanburg South Carolina. This is not a solicitation or financial advice. This article should only be used for educational purposes. Please consult with IntelliVest Wealth Management about your personal financial situation.

401(k) vs. 403(b): Understanding the Differences and Choosing the Right Retirement Plan