Clearing the Confusion: Demystifying 403(b) and 401(k) Retirement Plans

I often receive a question that goes something like this: "I have a 403(b), what does that mean? Why don't I have a 401(k)?" Essentially, people are curious about the differences between these retirement plans. Well, let's clear up the confusion. A 403(b) is essentially the same as a 401(k) in terms of how they work for you as an individual. The primary distinction lies in the tax code and who is eligible for each.

403(b) vs. 401(k): Understanding the Basics

First and foremost, a 403(b) is typically offered by employers that are either non-profit organizations or government agencies. On the other hand, 401(k)s are more commonly associated with for-profit businesses.

Now, let's delve into how they function from your perspective:

1. Contributions:

• With both 403(b)s and 401(k)s, you can typically contribute money either before or after taxes.
• You also have the option to choose between a Roth or traditional side for your contributions.

2. Investment Options:

• Both plans offer investment options, which usually include a list of index funds or mutual funds.
• The range of investment choices can vary depending on your employer's plan.

3. Employer Matching:

• In both cases, your employer may or may not provide a matching contribution to your retirement account. This depends on your employer's policy.

4. Rollover Options:

• When you leave your employer, whether due to changing jobs or retiring, you can roll over the funds from your 403(b) or 401(k) into either a traditional IRA or Roth IRA.
• At this point, they are treated the same, and you have control over managing your retirement savings.

The Crucial Distinction: Tax Codes

So, what's the significant difference? It boils down to the tax code under which these plans operate. This tax code discrepancy is what gives them their distinct titles (403(b) and 401(k)).

Additional Note: The 457 Plan

For those working in government positions, there's another retirement savings option known as the 457 plan. This plan allows government employees to contribute extra money toward their retirement savings, alongside their 403(b) or 401(k) if they happen to run their own business as well.

In summary, while the titles may differ due to varying tax codes, the fundamental aspects of 403(b)s and 401(k)s are quite similar when it comes to how they work for you as an individual. Your options for contributions, investments, and rollovers are largely the same. So, whether you have a 403(b) or a 401(k), rest assured that you are taking steps towards securing your financial future.