403b vs 401k

Both 403b plans and 401k plans are two types of employer-sponsored retirement plans with certain specific tax benefits. Both plans permit deduction of contributions from taxable income in the year in which contributions are made. 403b and 401k plans promote savings for retirement. However, there are certain basic differences between the two plans
The main difference between the two types of plans is regarding the persons eligible for each plan. While 403b plan, also known as, a tax-sheltered plan is a retirement plan for employees of specific tax-exempt institutions, such as schools, colleges, universities and other non-profit organizations, 401k retirement plan is available to employees who work for business entities.

Besides this basic difference, there are other differences between 403b and 401 k retirement's plans, as well. The company is allowed to make matching employers' contributions to a 401k plan. However, no matching contributions are permitted in 403 b plans. Nevertheless, if the 403 b plan is covered under Employee Retirement Income Security Act (ERISA), the employer also makes contributions to employee accounts, subject to certain restrictions. Although, 403b plans can invest in annuities, money-market accounts and mutual funds, 401k plans have much wider investment options, such as stocks and bonds as well.

403b is similar to a 401k plan in some respects. Employee salary contributions into 403 b plan are made before income tax is paid and allowed to grow tax-deferred until the money is taxed as income when withdrawn from the plan. From 2006 onwards, both 403b and 401k may also include specified Roth Contributions, after-tax contributions, which if certain requirements are fulfilled, will permit tax-free withdrawals. However, the specified Roth contributions have to be in the plan for at least five taxable years. Roth IRA (Individual Retirement Account) is a special type of retirement plan under US law that is generally not taxed, subject to certain conditions. Both the 401 k and the 403 b have certain restrictions regarding the amount of annual income that can be transferred into the fund as well as limitations and penalties for early withdrawal.

Neither 401k nor 403b plan has any one plan that is uniformly utilized by all employees. There are variations in the degree of matching contributions that employers will make to 401 k fund, ranging from no matching contributions, matching only about half of the income placed into the plan by the employee to full matching contribution
In 403b plan, employees will not have to give up any of their plan when they leave the organization. Many 401k plans require employees to have worked for up to five years, before they can get full value of the funds in their account, when they leave. Many employers require an employee leaving the organization to close his 401k account to avoid high administrative costs, where as employers offering 403b plans will not impose any such regarding closing of their account at the time of leaving. From administrative point of view, 403 b plans do not have many of the same technical difficulties that 401k plans have.

A 403(b) plan, according to research is a tax-advantaged retirement savings plan available for public education organizations, self-employed ministers, some non-profit employees, but only IRS Code 501(c)(3) organizations and co-operative hospital service organizations, based on information obtained. The 403(b) plan has a tax treatment which is reported to be similar to the 401(k) retirement plan, based on research data. Employee salary deferrals into a 403(b) plan are made before income taxes are paid and are allowed to grow tax-deferred until the money is taxed when the funds are withdrawn from the retirement plan, based on information obtained. From the tax year 2006, this plan could include designated Roth contributions, which are after-tax contributions, which will then allow for tax-free withdrawals if certain conditions are met. One such condition being, the designated Roth contributions have to be in the retirement plan for at least five taxable years, based on research data.

The 403(b) retirement plan is also known as a tax-sheltered annuity plan, based on research. If an early withdrawal is made from the 403(b) retirement plan, the Internal Revenue Service, will reportedly charge a mandatory 20% as federal taxes on the withdrawal, before it is then additionally taxed as ordinary income, based on information obtained. Consulting a tax accountant would be a sound idea. There is no discrimination testing of the 403(b) plan as is with the 401(k) retirement plan, according to information secured. Instead the 403(b) plans are subject to universal availability, which therefore means that all employees must be allowed to make salary-deferred contributions. The 403(b) retirement plan also has a much more simpler and less costly annual reporting requirements on IRS Form 5500, according to research data. There is no independent auditor requirement applicable to qualified plans with more than 100 plan participants, for the 403(b) plan based on information obtained.

A 401(k) retirement plan is said to have its name taken from sub-section 401(k) of the Internal Revenue Code, Title 26 of the United States. An employer is allowed to match contributions made by the employee to this plan, based on research. A person who contributes to the 401(k) plan is able to withdraw money, after they reach the age of 59 1/2 years, based on research information. This type of fund was reportedly started in the 1980's. There is no tax on the interest earned on the money in the 401(k) account before the funds are withdrawn, according to information obtained. Stocks, mutual funds also company stock can be a part of the 401(k) account. Reallocation of investments can be done whenever the employee chooses to. The 401(k) type retirement plans have been used by individuals, to try to make sure that they have adequate funds when they reach retirement age, based on information obtained. Many pension funds of various companies have been reported as not having the necessary funding for company retirement pensions, based on research data