The employer-sponsored 401(k) plan is so ubiquitous that “retirement plan” and “401(k)” are often used interchangeably by working Americans. For good reason, too. For many Americans, the 401(k) is the vehicle through which they will accumulate the proverbial “nest egg”.
A 401(k) plan is a qualified employer-sponsored retirement plan in which eligible employees may make tax-deferred contributions from their salary or wages on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis. 401(k) plans are offered through private employers.
If a worker is offered a retirement plan as part of their employment, chances are that the plan is a 401(k). But what about a 403(b) plan? Millions of Americans contribute to 403(b) plans rather than 401(k) plans, so it’s useful to explore more. How are these two types of plans similar? How are they different?
- Annual contribution limits
- Tax-deferred advantages
- Roth options may be offered
- Age 59 ½ early withdrawal rules
- Age 72 required minimum distribution (RMD) rules
- Similar investment options
- 403(b) plans are generally offered through non-profit or government agencies, while 401(k) plans are generally offered though for-profit private companies
- Additional catch-up options for 403(b) plans
- Different regulatory rules related to government oversight
Overall, 403(b) plans and 401(k) plans are very similar. In fact, without close inspection, they will look almost identical to an average participant. In the end, a 403(b) is as good as any 401(k) in helping you save for retirement.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.