401K Retirement Plan vs 403B Retirement Plan – Difference and Comparison

What is a 401K Retirement Plan?

Generally offered by employers in the US, a 401K Retirement Plan is a savings mechanism during the career of employees to pay them a considerable amount of money for spending post-retirement life. This plan also helps in evading taxes imposed by the government on income. 

When an employee signs up for a 401K Retirement Plan, he comes to an agreement that he will allow his employer to deduct a specific amount from his salary to be transferred into his retirement plan account.  Historically, this plan was put into practice by Congress to facilitate citizens in saving money for their post-retirement life.  There are two types of such plans: Traditional 401K Retirement Plan and Roth 401K Retirement Plan. 

Upon signing the former plan, an employee contributes to his savings when an amount is deducted from his gross income. Consequently, the taxable income is lowered. But the employee has to pay the tax when he withdraws at retirement. In Roth, everything remains the same except that the deduction is made from the taxable income. Therefore, in it, the employee does not have to pay more taxes at the time of withdrawal.

What is a 403B Retirement Plan?

A 403B Retirement Plan is specially designed to facilitate certain strata of employees. For example, the employees of tax-free organizations, teachers, professors, doctors, and other government employees are given the opportunity to sign up for this plan. This plan works on the formula of payroll deductions to pile up savings for post-retirement life.

This plan has the capacity to save as other renowned plans, i.e., $20,500. Combined contributions to this plan do not exceed $61,000. It has a condition that the employee must be 59½ if he wishes to withdraw funds without bearing a decrement loss. There are many advantages and disadvantages to this plan. 

In the regular 403B Retirement Plan, there are no tax payments until the payment is withdrawn at retirement. If an employee has served for more than fifteen years, he can enjoy increased contributions. In case you withdraw funds before 59½, you should bear a penalty. There are fewer investment opportunities in this plan. 

Difference Between 401K Retirement Plan and 403B Retirement Plan

  1. A 401K Retirement Plan is offered to employees who serve in private institutions, whereas a 403B Retirement Plan is made explicitly for government employees and educators
  2. A 401K Retirement Plan offers more investment plans and stocks, whereas a 403B Retirement Plan encompasses only funds and other benefits
  3. The pricing for a 401K Retirement Plan is comparatively higher, whereas the pricing for a 403B Retirement Plan is relatively lesser
  4. The contribution limit in a 401K Retirement Plan is limited, whereas the contribution limit can be increased in the 403B Retirement Plan if specific requirements are met
  5. A 401K Retirement Plan has stricter rules, whereas a 403B Retirement Plan’s rules have leniency.

Comparison Between 401K Retirement Plan and 403B Retirement Plan

Parameters of Comparison401K Retirement Plan403B Retirement Plan
RecipientsThe recipients of the plan are mostly private companiesSpecially designed for the good of government employees and academicians
PricingIts pricing is relatively higherThe price is quite lower for this plan
Investment PlansIt offers diverse and profitable investment plansThere are mere funds and some annuities
Contribution LimitThe contribution limits are generally fixed The contribution limit can be increased as per the criteria
RulesTheir rules are slightly tighter, with more benefitsThe rules are somewhat lighter, with some fewer benefits

References

  1. https://www.cambridge.org/core/journals/journal-of-pension-economics-and-finance/article/do-401k-plan-advisors-take-their-own-advice/986CBE1446AF4042918FD54FCCFA8597
  2. http://fpperformancelab.org/wp-content/uploads/Determinants-of-Retirement-Savings-Plan-Participation-A-Discriminant-Analysis.pdf