What Is the Difference Between a 401(k) & 403B Account?
The 401(k) plan and the 403(b) plan are both employer-sponsored retirement plans that meet Internal Revenue Service (IRS) requirements to allow tax-free contributions. These plans are very similar in their benefits and regulations. The IRS' "Publication 571" provides a complete description of a 403(b) plan, and its website offers an explanation of what a 401(k) involves, in addition to outlining regulations employers must follow to establish these plans.
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Differences
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The only difference between a 401(k) and a 403(b) plan is that the first one is offered by for-profit employers. Any type of profitable business, such as a finance company or retail store, might offer a 401(k) plan to its employees. In contrast, a 403(b) plan is for employees of not-for-profit companies and institutions, such as schools and hospitals. Profitable companies are not allowed to establish 403(b) plans.
401(k) Definition
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A 401(k) plan is an employer-sponsored retirement plan that allows employees to make tax-free contributions to their retirement savings accounts until they begin receiving distributions. This is a type of defined contribution plan, a retirement plan in which the amount of benefit collected upon retirement is determined by how much the employee invests and how much his contributions grow over time. 401(k) plans also allow employers to match their employees' contributions. Generally, employers receive tax benefits for contributions they make to employee accounts.
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403(b) Definiton
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A 403(b) plan is a retirement plan for employees of tax-exempt organizations, public schools and some churches. As with 401(k) plans, 403(b) plans allow tax-free contributions up until distributions begin. The earnings and interest generated on this plan are also tax-free. Any employee of an eligible organization can participate in a 403(b) plan. This type of plan is also a defined contribution plan, since the benefits employees receive upon retirement are determined by how much they have invested in their accounts. Individuals are not allowed to set up 403(b) accounts; only employers are allowed to do this.
Limitations
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Deductible contributions to both 403(b) and 401(k) plans are limited. As of 2010, the limit on tax-free contributions to a 403(b) plan is $16,500 per year. For employees older than 50, $5,500 can be added to this. Combined contributions to a 401(k) account cannot exceed the lesser of 100 percent of wages or $49,000 annually.
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