Understanding the difference between 401k vs 403b

A big part of being financially stable is making retirement plans. The 401(k) and 403(b) are two well-known employer-sponsored retirement plans. Even though they have some things in common, knowing what makes them different can help you make smart choices about your financial future. Let’s talk about what makes these retirement accounts different and how they can help you reach your long-term savings goals.

401k vs 403b: What’s the Difference?

Planning for retirement is important for making sure you have enough money in the future. 401(k) and 403(b) plans offered by employers can help you save money on taxes and make investments. With these plans, employees can save for retirement by having money taken out of their paychecks automatically. Knowing the differences between each plan can help you save as much as possible for retirement. To help you make smart choices about your retirement, let’s look at the most important parts of 401(k) and 403(b) plans.

Understanding 401(k) Plans

401(k) plans are ways for employees of for-profit businesses to save for retirement. With these plans, employees can put away some of their salary before taxes. The money in a 401(k) grows tax-free until it is taken out, which usually happens when the person retires. A lot of employers will match your contributions, which is like getting money for free to help you save for retirement. 401(k) plans usually offer a range of mutual funds as investment options, and sometimes they also offer company stock.

Looking at 403(b) Plans

403(b) plans, which are also called tax-sheltered annuities, let people who work for public schools, non-profits, and some religious groups save for retirement. Like 401(k) plans, 403(b) plans let you put money away and let it grow tax-free. When it comes to investments, 403(b) plans, on the other hand, usually only offer annuities and mutual funds. Because of recent changes, many of these choices are now bigger. In some 403(b) plans, employers will match your contributions, but this happens less often than in 401(k) plans.

Some important ways that 401k vs 403b plans are alike

A lot of the important parts of both 401(k) and 403(b) plans are the same. Both have tax benefits that let employees put money in before taxes are taken out. This saves for retirement while lowering current taxable income. IRS rules say that the most you can put into each plan each year is the same amount. The limit for 2024 is $23,000, and people aged 50 and up can add an extra $7,500 as a catch-up payment. Both plans also have Roth options, which let you put money in after taxes and take money out tax-free when you retire.

Different Things About 401(k) Plans

Companies that make money usually offer 401(k) plans. Most of the time, they offer more investment choices than 403(b) plans. In a lot of 401(k) plans, you can invest in company stock. In 401(k) plans, employer matching contributions are more common, and many businesses will match a portion of what their employees put in. Nondiscrimination testing is done on 401(k) plans to make sure they don’t unfairly help high-paid employees. This can sometimes make it hard for people with high incomes to contribute.