403b Retirement Plan vs. 401k
By and large, 403b and 401k retirement plans are similar. The plans are named for their respective sections of the U.S. tax code. They are tax-deferred vehicles for retirement savings. The main difference is that 401k plans are offered by private-sector employers and 403b plans are offered by certain public-sector employers.
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Tax Implications
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Both 401k and 403b plans provide tax benefits to the participant. Both allow an employee to make tax-deferred contributions, which means that the money (both principal and earned interest) would not be taxed until the employee begins to withdraw from the account during retirement. For most people, this tax deferment means a lower tax rate since they will withdraw the money and be taxed on it during a low-earning (and therefore, low tax bracket) year during retirement.
Contribution Limits
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Both types of retirement plans have contribution limits. These limits change from year to year and will be tied to inflation in future years. For 2009, the contribution limit for both plans was $16,500; it did not change for 2010. The catch-up contribution limit—that is, the additional amount that people age 50 or older are allowed to contribute—was $5,500 in 2009 and 2010.
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Sponsoring Entity
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The primary difference between 403b and 401k plans is the sponsoring employer. Private-sector companies offer employees 401k plans, while public schools and some charitable organizations offer 403b plans to employees. An employee is only eligible to actively participate in one type of plan at a time. Therefore, if a person switches from a private-sector job to a job at a school, for example, he would have the option to roll over his 401k money into his new 403b.
Legal Restrictions
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Though the plans typically serve the same purpose, there are a few minor legal differences between the account types. Employer-sponsored 401k plans are generally governed by strict legal guidelines regarding the monitoring of contribution levels and investment activity. These restrictions result from the Employee Retirement Income Securities Act (ERISA). Typically, 403b plans are not subject to the same restrictions since they are managed differently.
Matching and Vesting
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No federal requirement mandates that companies provide matching contributions to either an employee’s 401k or 403b plan, though most employers do provide match money as an employment benefit. Further, no federal law dictates the length of time required for vesting—that is, the amount of time an employee is required to work before he is entitled to keep all of the company’s match money even if he leaves the company. Most public- and private-sector employer require one to 10 years of service before an employee’s 401k or 403b is fully vested.
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