The main difference between the two plans is employment sponsorship. 401(k) plans are generally offered by private, for-profit companies, while 403(b) plans are only available to non-profit organizations and government employers.
In the United States, the best retirement plans are the 401(k) and 403(b), salary reduction plans, that tens of millions of employees contribute to. Other developed countries have similar retirement program around the world. What makes 401(k) and 403(b) so good is that many employers add 25 cents or even more to each dollar you choose to save this retirement plan. You are advised to save in 401(k) and/or 403(b) if your employer offers a deal like this.
Even if your employer doesn’t augment your own contribution, you should fund your 401(k) and/or 403(b) to the limit, because:
- It is a relatively painless way to save.
- You avoid taxes on the money you contribute until, many years later, you withdraw it.
- In the meantime, no tax is due as it grows.
You get government’s share of your income working for you all those years as well as your own. The tax drag is lessened considerably. In 2022, employees could contribute as much as 20,500 USD to a 401(k) if their income was high enough (the contribution limit is based on a percentage of salary), plus as much as 6,500 USD more if they were at least 50 years old.
Can You Contribute To The Both 401(k) And 403(b)
If you have employment in two firms (say a private corporation and also a public hospital) you may be offered both a 401(k) and 403(b), and you are allowed to contribute to both. However, you would still be subject to the 20,500 USD contribution limit total between the two accounts.
How The Retirement Plan Works
The 401(k) and 403(b) are long-term money, so you should lean heavily on the alternative that does best over the long term, such as stocks. However, there will be years when the value of your 401(k) drops sharply. But over the long run, the odds are in your favour.
With a 401(k), an employee sets a percentage of their income to be automatically taken out of each pay check and invested in their account. Participants can choose how to allocate their funds among the investment choices offered by the plan, which usually include a variety of mutual funds.
Disadvantage Of 401(k) and 403(b)
There are, however, some challenges with a 401(k) and 403(b) plan. Most plans have limited flexibility as it relates to quality and quantity of investment options. There can be early withdrawal penalties equal to 10 percent of the amount withdrawn before age 59 years old.