Your financial plan for retirement: what’s the difference between a 401(k) and 403(b)?
July 22, 2021 at 7:00 AM
Your financial plan for retirement: what’s the difference between a 401(k) and 403(b)?

There is a lot of jargon that goes with managing your retirement funds. With several different types of 401(k) and IRA accounts as well as the 403(b), contribution limits, and long-term tax implications, it can be confusing to get started. At Help You Retire, we can educate you more about your financial plan for retirement by teaching you about the differences between the accounts. Today, we’ll specifically address the differences between a 401(k) and 403(b).

401(k)

Who sponsors it?

The person or entity that sponsors your account depends on whether you’re managing a traditional 401(k) or an individual 401(k). A traditional 401(k) is an employer-sponsored plan that’s paid into by both the employee and a certain level of match by the employer. The account is managed by a financial services advisory group, which means that after you’ve spent a predetermined amount of time with the company, you can leave and keep the money that was contributed to your account by your employer.

An individual (or solo) 401(k) is what it sounds like and is managed by an individual who is self-employed and has no full-time employees. Other than the sponsor, the solo 401(k) works the same as a traditional 401(k) in that you’re limited in your annual pre-tax contributions.

How much can I contribute each year?

The IRS has set yearly thresholds to limit the amount of non-taxable benefit you can get from your retirement account each year. In 2021, you’re limited to contributing $19,500 to your 401(k) for the year. If you’re age 50 or older, you can make catch-up contributions up to $6,500. The limit is the same for a solo 401(k).

403(b)

Who sponsors it?

Similar to a 401(k), a 403(b) is sponsored by the employer. However, a 403(b) in particular is offered by tax-exempt 501(c)(3) non-profit organizations. If you work for a qualified non-profit organization, the employer can contribute a specified match to your account but isn’t legally obligated to do so. In fact, many will opt to not contribute with a match program as they will lose their exemption from the Employee Retirement Income Security Act (ERISA), which means that there aren’t standards for vesting or payment of benefits through a federally chartered corporation.

How much can I contribute each year?

The maximum allowable contribution to your 403(b) is the same as that of a 401(k). You’re limited to $19,500 in pre-tax contributions with a cap of $6,500 in catch-up contributions over the age of 50. However, you can defer either $58,000 or your entire compensation, whichever is less.

In addition to your regular maximum, you can include more to your catch-up contributions after you have 15 years of service with the organization. The IRS allows the least of the following deferral limits:

  • $3,000
  • $15,000 but you must take away the amount of additional deferrals made in prior years
  • $5,000 multiplied by the number of years of service, minus the total deferrals from earlier years

Where can I get help managing my retirement account?

Planning for retirement can be a complicated process. With IRS tax laws and stipulations, it takes an expert to make sure that you’re going to have the money you need to be prepared.

At Help You Retire, we recommend that you call the good people at OWLFI to learn more about managing your financial plan for retirement. They have a team of CPAs, attorneys, and financial advisors who can help you put together a retirement plan that’s meant to fit your budget now and well into the future. Reach out to schedule an appointment.

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