401k vs. 403b – What is the Difference?

Depending on the job you take, you may be presented with the opportunity to invest in a 401k or 403b retirement plan.  Tax-exempt organizations, such as schools, hospitals and non-profit organizations typically offer a 403b, while for-profit organizations typically offer a 401k plan. Both plans allow you to contribute money before taxes and all contributions grow tax-deferred.

Investment Opportunities

With a 401k plan, you have a wider range of investment opportunities than with a 403b.  While the specific investments available depend on the 401k plan offered by your company, with a 403b you are only able to invest in mutual funds and annuities, which limits your investment opportunities.

Company Match

A lot of companies that offer a 401k also offer a company matching plans.  The amount of the match varies by company, but it allows you to double your contributions up to a certain amount.  Organizations that offer a 403b are allowed to provide company matches, but due to smaller budgets, many opt-out of providing a company match.

Contribution Limits

Both 401k and 403b plans have the same general contribution limits.  Under both plans, employees are allowed to contribute up to $17,000 a year in 2012, with an additional $5,500 allowed in catch-up contributions for employees who are 50 or older.  Beyond those limits, 403b plans have special contribution limits for employees who have been with a company for at least 15 years.  These long-term employees may contribute an additional $3,000 each year until they reach $15,000.  This means an employee could contribute an additional $3,000 a year for five years, an additional $1,000 a year for 15 years or some other combination until the $15,000 limit is reached.

Bankruptcy Protection

When you invest in a 401k, your contributions are protected by ERISA (the Employee Retirement Income Security Act).  This means if you file for bankruptcy, in most cases they will be unable to access your retirement funds to satisfy debts.  However, a 403b is not protected by ERISA.  While the chances of your retirement funds being accessed in the case of bankruptcy is small, you run a lower risk when you have a 401k vs. 403b.

Leaving a Job

An employer must pay an administrative cost to maintain a 401k for an employee.  When an employee leaves the company, the employee has a pre-determined amount of time to rollover the 401k or cash out the 401k. Since a 403b has no administrative costs associated with it, an employee who leaves a job often has the option of leaving the 403b intact.

Which is Better?

Essentially, the differences between a 401k and a 403b are minimal.  While a 401k offers benefits such as more investment options and larger company matches, a 403b features fewer fees and increased contribution limits in the long-term.  Take advantage of whichever plan your employer offers to start saving for retirement.


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