403b Retirement Plans: 401k vs. 403b Retirement Plans

To be protected in the future, employees of different organizations, both in private companies and non-profit groups, are recommended to secure their retirement plans such as 401k plans or 403b retirement plans. What are 401k plans and 403b retirement plans? What are the differences between these two plans? What can these do for beneficiaries?

401k plans and 403b retirement plans are both types of retirement plans given to employees who that can be used beyond receiving regular compensation from their employment. 401k plans are generally provided to employees who work in private companies. Once an employee reaches the retirement age and has had his or her last job in a private company, that employee is qualified to withdraw from their tax deferred 401k plan.

The 401k Plan

The 401k plan, which got its name from a subsection of the Internal Revenue Code, is like a savings account of the contributor or the employee wherein he or she can withdraw his or her funds when the retirement age is reached. Before the retirement age, restrictions exist pertaining to withdrawal of funds. Although some employers give their employees permission to withdraw from their own funds before the retirement age, the total amount that employees withdraw will be subject to an excise tax, which is usually 10 percent of the amount.

For the contribution policy, the 401k plan can vary depending on the arrangement between the employee and employer. The returns provided for the employee when he or she retires from his or her work in a private company are subject to the total contribution and investment returns accrued throughout the life of the plans funding.

The 403b Plan

On the other hand, a 403b plan is similar in concept with a 401k plan in terms of withdrawals, tax rules, contribution limits and investment choices. Although most of the aspects are similar, these two plans are different in terms of qualifications of beneficiaries.

This is because a 403b plan is provided for those who work in a non-profit or tax-exempt organization such as in non-profit education or medical groups, libraries, charities and other similar institutions.

The 403b is also designed for workers in public schools, colleges and universities. Church workers are encouraged to participate in a 403b plan. Moreover, a number of self-employed ministers are also eligible or qualified to use the benefits of a 403b retirement plan.

A 403b plan has proven to be very beneficial to its contributors. It provides adequate support for workers of these organizations to attain or achieve their retirement goals.

In a 403b plan, a portion of the salary of an employee or contributor is added to the total funds and at the same time, the employer will also sometimes provide a contribution. In some cases employers offer contribution matching, which is an excellent opportunity to increase your compensation simply by participation in your 403b.  Free money. Additionally, 403b’s do not require employees to pay taxes on their contributions, which also maximize the benefit of the retirement contribution.

When participating, you will typically be offered a number of investment options for your 403b funds, some offering greater security while others entail greater risk but opportunity for better short term returns.

Investment Options

There are three investment options in 403b plans: 1) fixed annuities, 2) variable annuities and 3) mutual funds. Fixed annuities are ideal for those who favor guaranteed interest rate returns. With variable annuities, contributors have the freedom to choose their investments and earn returns based on the performance of these investments while mutual funds are investments in stocks, bonds and the like.

Although these three investment options have different elements, you should make your choices based on your risk profile, age and financial requirements. To make the most of your 403b contributions it is recommended to consult with your accountant.

Are you taking advantage of the tax deferred savings a 401k plans and 403b retirement plan can provide you?  If not, why not?  If you are in a position to begin investment into your retirement plan but would like more information, contact us today and talk with us about the options until you are confident you are making the right decision for your future.

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