403(b) vs. 401(k): What’s the Difference?

A retirement savings plan is a key part of helping you and your family achieve your vision for the future and ensure you are provided for during retirement.

Sometimes, however, all of the options and tax code details can be a bit hard to decipher. 

But it is important to take your time to understand your options so you can make an informed decision about what is most suitable for your personal financial strategy. 

For example, though both a 401(k) and a 403(b) offer pre-tax options to contribute money toward your retirement and are offered by employers, there are actually quite a number of key differences for those who qualify to consider before making their next investment decision.

Here is what you need to know about these two tax-advantaged retirement options.

The Scope of Eligible Employers and Employees

The biggest difference when it comes to 403(b)s versus 401(k)s is who is eligible to participate in the different retirement plans. 

For a 403(b) plan, you must be an employee of a public educational institution, which includes public schools, universities, and colleges as well as, in certain cases, nonprofits, churches, and church-related organizations.

In contrast, 401(k) plans are offered by for-profit companies to eligible employees. Employers need to establish a 401(k) plan that is in alignment with Internal Revenue Code Section 401(a). 

In both cases, IRC code requires employers that want to establish 401(k) or 403(b) plans to create and administer them with rules that meet IRS requirements for things such as “when participants have a nonforfeitable right to their plan benefits,” “how much may be contributed to the plan by both participant and employer,” and “how distributions from the plan may be made.”

The Typical Time to Be Vested in the Plan

Another difference between the two types of plans is the amount of time it takes to become vested in it, which means that your contributions—and your employer matches—will be available to you when you retire. If you leave an organization before you are vested, you are given the opportunity to roll over your contributions or take a lump-sum payment, but you will not be able to bring your employer’s contributions with you.

Typically, 403(b) plans offer immediate vesting or shorter waiting periods to become vested as compared to 401(k) plans. On top of that, vesting periods for 401(k)s can vary both in time and structure.

For example, 401(k) vesting can be tiered, where you are eligible for a bigger percentage of your employer match over time, or simply date-based, which is all or nothing at a certain point. The IRS requires an employee to become vested no later than six years into their tenure with an organization.

Employer Matches

Speaking of employer matches, those who participate in 401(k) plans typically enjoy larger employer matches to their own contributions, even though both 403(b) and 401(k) plans allow them. This could be because of the nature of the organizations that provide 403(b) plans (i.e., typically nonprofit or public organizations).

Plan Administration

Finally, there is a marked difference between 403(b) versus 401(k) plans in who manages them and how they are managed.

Whereas 403(b) plans tend to be administered by mutual fund companies, 403(b) plans are more often administered by insurance companies or large investment firms. These differences translate into different investment options for employees, with 401(k) plans tending to offer a lot of mutual funds and 403(b) plans often limiting investment options and prominently featuring annuities.

How to Make the Best Decision for Your Family

Despite some of these key differences, 401(k) plans and 403(b) plans do have many similarities, too. This can make choosing which is most suitable for you and your family more complicated.

Fortunately, there are professionals with the tools and experience you need to help you develop a plan to realize your financial goals. If you want to learn more, click here to schedule your own personalized consultation with a member of the Harvest Wealth Group team. 

We also welcome you to read our free resource, Creating a Personal Financial Plan to Help You Reach Your Money and Life Goals.