Choosing the Right Retirement Account
401(k) and 403(b) accounts are both retirement savings options offered by employers. Since both types are tax-deferred, a set amount of money can be contributed to these accounts and excluded from taxable income.
Although 401(k) and 403(b) retirement accounts have a lot in common, there are a few characteristics that set them apart from each other. Get the scoop on these differences and advice for deciding which account is the right choice for you.
Who Can Offer 403(b) Retirement Plans?
One of the most notable differences between 403(b) and 401(k) retirement plans is who is eligible to offer these plans to their employees. A 403(b) is specifically for the employees of non-profits, the government, school districts and religious organizations.
This eligibility requirement exists because 403(b) retirement accounts qualify for exemptions from certain administrative fees. These exemptions are not applicable to 401(k) accounts, which are typically offered by for-profit organizations and corporations.
The Cost of Retirement Accounts
Although both 403(b) and 401(k) accounts may have fees, it’s common for a 401(k) to have additional costs beyond those of the 403(b). Since high administrative fees could have a negative effect on diligent saving habits, it’s important to understand all associated fees before opting into a new retirement account.
Here’s the good news — if an employer is matching employee contributions, anything saved will make a much bigger impact on retirement goals than the accounts fees.
Understanding Contribution Limits
An elective deferral limit determines just how much can be contributed to a retirement account while being excluded from taxable income. Both 401(k) and 403(b) plans have the same elective deferral limit of $16,500 each year.
For individuals over the age of 60, there is an exception to this rule, allowing employees to catch up on their contributions. These individuals can contribute as much as $22,500 to their 401(k) or 403(b) retirement account in a calendar year without tax penalties.
Which Retirement Account Is Better?
It’s difficult to say that one retirement account is better because it just depends. The fact is, if an employer is eligible to provide a 403(b), it’s likely they will choose that because of the lower administrative fees. If an employer is only eligible to offer a 401(k) retirement account, this will probably be the only employer-sponsored plan to choose from.
That being said, if the situation arises that affords you a choice, there is a lot to understand about administration fees and investment options, so seeking help can make a real difference.
A financial planner or a representative from the benefits provider can be an invaluable resource when making decisions about retirement savings. With their help, you can gain clarity about your options and move forward toward a financially healthy retirement.
~Here’s to Your Financial Health!
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