What's the difference between a 401(k) and a 403(b)? Find out when the 403(b) might work for you.
We all hear a lot about the importance of saving for retirement. And for many workers, access to a 401(k) plan is a key component in long-term planning.
But there are some workplaces that don’t offer a 401(k). Instead, they may offer 403(b) plans. If you work for a nonprofit organization, a school, a hospital, or as a minister, you’ll likely be choosing among 403(b) retirement plan options. Here’s what you need to know.
If your organization offers a 403(b) plan, and you’re eligible, you can contribute. Employers that offer 403(b) plans include:
It’s important to understand that there is no “solo” or “self-employed” option for a 403(b), such as you’d see with a 401(k). If you want to participate in a 403(b), it has to be set up by your employer. Self-employed ministers must be treated as employed by a qualifying tax-exempt organization, then contribute to an account administered through that organization.
For the most part, you’ll find that 403(b) plans are almost identical to 401(k) plans. In fact, employers that meet requirements to offer 403(b) plans can choose to offer 401(k) plans instead.
But there are some administrative process rules that are a little less stringent for some 403(b) providers. These rules can potentially reduce some of the associated costs, making 403(b) plans attractive to smaller organizations. There are also some interesting tweaks related to contribution limits.
On the surface, 403(b) contribution limits and tax treatment are similar to what you’d see with a 401(k) plan. The IRS sets the same contribution limits for 403(b) plans as for 401(k) and 457(b) plans.
For 2019, the contribution limit is $19,000 (with a catch-up option of $6,000 for those aged 50 and older). As with its 401(k) cousin, it’s also possible to make Roth contributions to your 403(b), if the plan allows. Your employer may also match employee Roth contributions, but this match would need to be tracked separately, as withdrawals from the match would be taxable—just like any pretax employee contributions.
Note that your combined contributions to 403(b) and 401(k) accounts are limited to $19,000. The IRS treats them the same, so you can split your contribution among accounts, but you can’t double it.
There are three primary advantages that come with 403(b) contributions over 401(k) plan contributions:
The key to filing taxes is being prepared. TD Ameritrade provides information and resources to help you navigate tax season.
How do 403(b) taxes work? Employee contributions are usually made pretax with your earnings growing tax deferred. You put your money in pretax, reaping the tax advantage today, and pay the 403(b) taxes when you withdraw from your retirement account down the road. Like a traditional 401(k), 403(b) plans are subject to required minimum distributions (RMDs) once you reach age 72.
However, if your employer offers a Roth option, you can use that for tax-free growth. You make contributions with after-tax money and don’t worry about paying taxes on withdrawals in retirement—or taking RMDs.
The 403(b) withdrawal penalty is also the same as the 401(k). You pay taxes on the amount taken, plus a 10% penalty if you take money before age 59 1/2. The Roth implications are also the same. You need to meet the minimum withdrawal age, plus have your account established for at least five years, if you want to withdraw earnings penalty free. As with other Roth accounts, though, you can withdraw contributions at any time without penalty.
In many ways, 403(b) plans really are cousins to the 401(k). However, there are some minor differences that can make a 403(b) retirement plan attractive in certain circumstances. Carefully consider your retirement planning needs and the availability of different plan choices as you decide.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.