"History of 401(k) Plans: An Update," Pages 1-2. The 401k plan is a retirement plan offered to employees of for-profit organizations. People are often familiar with the 401k. There are several types of retirement accounts to choose from, but assuming you’re not self-employed, you likely have either a 401(k) or 403(b) as your primary retirement account. Generally, the larger the company, the lower the plan fees because there are more people participating, which brings costs down. Unlike an IRA, where you can choose between most types of traditional investing products, the average 401(k) plan in 2016 had only 27 choices. Fees also eat into your balance. "Internal Revenue Manual 4.72.13.14: Nondiscrimination and Coverage." Accessed Sept. 24, 2020. United States Code. Accessed Sept. 24, 2020. The offers that appear in this table are from partnerships from which Investopedia receives compensation. A tax-deferred savings plan is an investment account that allows a taxpayer to postpone paying taxes on the money invested until it is withdrawn in retirement. Accessed Nov. 27, 2020. These include white papers, government data, original reporting, and interviews with industry experts. 401K ESTATE PLANNING. Accessed Nov. 27, 2020. Some typical examples include teachers, members of religious organizations, and hospital employees. If you work for a small company, consider lower cost index funds as an investment option instead of placing money in higher priced actively managed funds. Employees of tax-exempt organizations are eligible to participate in the plan. The names are derived from the relevant IRS tax code and are often written 403b and 457b or even 403 and 457. The Balance uses cookies to provide you with a great user experience. Medicare wages are employee earnings that are subject to a U.S. payroll tax known as the Medicare tax. Another key difference between 403(b) and 401(k) plans lies in the investment options each offer, although that distinction lessens over time. A 403(b) plan is also another name for a tax-sheltered annuity plan, and the features of a 403(b) plan are comparable to those found in a 401(k) plan.. ERISA vs. non-ERISA plans – 403(b) plans without employer contributions, or those sponsored by governmental employers or churches will not automatically be subject to ERISA. A 401k is for people employed by a for-profit organization. "401(k) Resource Guide - Plan Participants - General Distribution Rules." A 403(b) plan is a retirement plan for specific employees of public schools, tax-exempt organizations, and certain ministers. In these cases, employees may contribute to both accounts. Accessed Nov. 27, 2020. If you're looking to stash away more cash each year than you're allowed in an individual retirement account because of the lower contribution limits, a 401(k) plan or 403(b) plan could be just the ticket. The law allows these organizations to be exempt from certain administrative processes that apply to 401k plans. A non-qualified annuity is funded with post-tax dollars. Still, most 403 (b) plan investment menus tend to offer annuity options from insurance companies. Internal Revenue Service. "IRC 403(b) Tax-Sheltered Annuity Plans – Establish a 403(b) Plan." Internal Revenue Service. 403(b) plans are very similar to 401(k) plans, except that where 401(k) plans are sponsored by for-profit businesses, 403(b) plans are for not-for-profit organizations that are tax-exempt under IRS Code 501(c)3. "401k Plans." Learn more about a 403(b) versus a 401(k). Internal Revenue Service. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Final Thoughts on 403b Vs 401k. From the perspective of the average employee, there are few differences between a 401(k) and a 403(b). One isn’t better than the other. After that, open an IRA if the plan’s fees are high or if you want to diversify your investments to options not available in your 401(k) or 403(b). De wet staat deze organisaties toe om te worden vrijgesteld van bepaalde administratieve processen die van toepassing zijn op 401k-plannen. Toby Walters is a financial writer, investor, and lifelong learner. 403(b)(7)." 401(k)s and 403(b)s are similar; one isn't necessarily better than the other. "Retirement Topics - Catch-up Contributions." "What Is a Pension?" "Choosing a Retirement Plan: 403(b) Tax-Sheltered Annuity Plan." Accessed Nov. 27, 2020. Accessed Nov. 27, 2020. "Internal Revenue Manual 4.72.13.1.9: IRC 403(b) Filing Requirements." Accessed Sept. 24, 2020. You can choose from a limited range of investment options in both types of plans. "Income Ranges for Determining IRA Eligibility Change for 2021." However, the tax burden you’ll incur varies by the type of 401(k) and on how and when you withdraw funds from it.. Investment Company Institute. Although non-profit companies like public schools, hospitals, and governmental organizations offer their employees 403b retirement accounts instead of 401k. 401 (k)s are offered by for-profit companies. Internal Revenue Service. "Retirement Plan Products and Services, Comptroller's Handbook," Page 89. Employer-sponsored retirement plans are an alphabet soup of Internal Revenue Code citations. One of the factors that most distinguishes the 401 (k) plan – as well as the 403 (b) 457 plans, since they all have the same limits – is the very generous contribution amounts. 401k vs 403b. 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