They say it is important to save for a rainy day. This is true, especially when we reach our prime years and beyond. When we still have the energy for work, we must also think about our plans for retirement. That is where a 401k and a 403b plan come in. They are helpful savings plans that can help us become financially equipped for our future. Some people think they are one and the same, but they are actually different. Continue reading this article to determine what differentiates a 401k from a 403b.
Summary Table
| 401k | 403b |
| Offered to employees of “for-profit” organizations – private companies such as networks, telecoms, banks, etc. | Offered to employees of tax-exempt or non-profit organizations like public schools, universities, churches, or hospitals |
| Higher administrative cost | Lower administrative cost |
Definitions
A 401k is a savings plan offered by private companies to their employees to help them save for retirement. Through a 401k, employees can save and invest a part of their hard-earned salaries before they are taxed. Taxes will not be paid until part or all of the money is withdrawn from the account.
A 403b is a retirement savings plan offered to employees of non-profit organizations. The salary deferrals are made prior to paying the income tax. Through the 403b plan, organizations with a limited budget can help their employees save for retirement.
401k vs 403b
The main difference between a 401k plan and a 403b plan boils down to the type of company or organization that typically offers that specific plan. A 401k is a savings plan offered to employees of “for-profit” companies or organizations. Private companies in any industry such as telecoms, banks, networks, and a host of other fields can provide a 401k plan to their employees. A 403b plan, on the other hand, is a savings plan offered to employees of tax-exempt or “non-profit” organizations. The organizations that fall under this category would be public schools, universities, religious groups, hospitals, and governmental organizations.
Another difference would be the administrative cost. Private companies who offer 401k plans are not exempt from certain processes; hence administrative costs tend to be higher. Conversely, the law allows companies with small budgets (non-profits) to be exempt from such regulative processes by using a 403b, therefore lowering the cost of paperwork.
