403(b) vs. 401(k): A Comprehensive Comparison

When it comes to retirement savings, two popular employer-sponsored plans are the 403(b) and the 401(k). Both plans offer tax advantages and similar contribution limits, but they have distinct features that cater to different types of employees. This article explores the similarities, differences, advantages, and disadvantages of 403(b) and 401(k) plans to help you make an informed decision about your retirement savings.



Similarities

1. Tax Advantages: Both 403(b) and 401(k) plans offer tax advantages. Contributions are made pre-tax, reducing your taxable income, and investments grow tax-deferred until retirement. Additionally, both plans offer Roth options, allowing you to contribute after-tax dollars and withdrawals tax-free in retirement.
2. Contribution Limits: The annual contribution limits for both plans are the same. In 2024, the limit is $23,000 for those under 50, with an additional $7,500 catch-up contribution for those aged 50 and older.
3. Employer Match: Both plans allow employers to match employee contributions, providing an additional source of retirement savings.

Differences

1. Eligibility: The primary difference between 403(b) and 401(k) plans is their eligibility requirements. 403(b) plans are available to employees of public schools, churches, and tax-exempt organizations, while 401(k) plans are offered by for-profit companies.
2. Investment Options: 401(k) plans typically offer a broader range of investment options, including mutual funds, annuities, individual stocks, and bonds. In contrast, 403(b) plans often have more limited investment options, focusing mainly on mutual funds or annuities.
3. Catch-up Contributions: 403(b) plans offer an additional catch-up provision for employees with 15 years of service or more, allowing them to contribute up to $3,000 more per year, with a lifetime limit of $15,000. This extra catch-up provision is not available in 401(k) plans.

Advantages and Disadvantages

403(b) Plans

*Advantages:*
- Additional catch-up contributions for long-serving employees
- Lower administrative costs, potentially resulting in lower fees
- More flexible withdrawal options, including loans and hardship withdrawals

*Disadvantages:*
- Limited investment options
- Fewer employer matches
- Less stringent nondiscrimination testing, which may lead to higher contributions for highly compensated employees

401(k) Plans

*Advantages:*
- Broader range of investment options
- More employer matches
- Better suited for employees of for-profit companies

*Disadvantages:*
- No additional catch-up contributions for long-serving employees
- Higher administrative costs, potentially resulting in higher fees
- More stringent nondiscrimination testing, which may limit contributions for highly compensated employees

In conclusion, both 403(b) and 401(k) plans offer valuable retirement savings options with their unique advantages and disadvantages. When choosing between the two, consider your eligibility, investment preferences, and long-term financial goals. Consulting with a financial advisor can help you make the best decision for your retirement savings.