Retirement planning is an essential part of a financial strategy. Among the various retirement plans available, 401(k) and 403(b) are the most widespread retirement saving options that almost every American employee can avail of. However, before choosing between the two, you must comprehend the distinctions between 401(k) and 403(b) plans. In this article, we will discuss which of the following is generally true about 401(k) and 403(b) retirement plans?
401(k) and 403(b) plans are typically employer-sponsored retirement savings plans that allow workers to save for their retirement. The primary distinction between the plans is the employers that offer them. 401(k) plans are offered to employees who work in private companies, while 403(b) plans are offered to non-profit organizations, government agencies, and educational institutions.
401(k) plans allow employees to contribute a portion of their pre-tax salary, reducing their taxable income. The sum of the contribution is then deposited into the investment account, which allows the funds to grow tax-free. In contrast, 403(b) plans allow workers of non-profit organizations to contribute part of their salary after-tax. The investment account then grows tax-deferred.
One significant advantage of both 401(k) and 403(b) plans is the employer match contributions. The company usually matches a portion of the employee’s contribution to the plan. For example, for every dollar the employee contributes up to a specified limit, the employer may match fifty cents to one dollar. This is an excellent way for employees to increase their retirement savings without having to increase their contributions.
Another similarity between the two plans is contribution limits. In 2021, both 401(k) and 403(b) plans have a contribution limit of $19,500. Additionally, employees who are at least 50 years old can make catch-up contributions. This means that they can contribute an additional $6,500 per plan, allowing them to save more for their retirement.
Finally, one notable difference between the two plans is the investment options. Generally, 401(k) plans offer a more extensive range of investment options than 403(b) plans. This is because 401(k) plans can invest in exchange-traded funds, while 403(b) plans primarily invest in annuities and mutual funds.
In conclusion, both 401(k) and 403(b) plans are excellent retirement options that allow workers to save for their retirement. While they do share some similarities, there are also some distinctions between the two which result in different scenarios. Depending on where you work and the kind of investments you focus on, one of these two could be the best suited for your retirement planning.
