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  Retirement Plans - 403(b) vs 401(k)  

Understanding the Difference

403(b) and 401(k) plans are both retirement plans that are supported by employers and carry specific tax benefits. Under both plans, one may deduct the total contributions made within that year from his taxable income associated with the same year.

Comparing 403(b) vs. 401(k) Plans

While 401(k) is a more known plan and most understand how it works, very few people have even heard of a 403(b) plan, let alone how it operates. A 403(b) plan is very similar to a 401(k) plan in the sense that it retains the same special tax treatment, in that contributions are deductible, and employees contribute a percentage of their paycheck. Additionally, the employer will likely match some amount of the employee's contribution. Typically, they will opt to match one's contribution to either his 403(b) or 401(k) to a specified percentage.

However, perhaps the most significant difference between a 401(k) and a 403(b) is who qualifies under each plan. Typically, a 401(k) is a retirement plan that is offered to employees in for-profit business entities. Conversely, 403(b) plans are offered by only non-profit entities, like charity organizations, schools, hospitals, and research institutions.

However, companies that offer a 403(b) retirement plan are not known for matching the contributions of their employees.  Additionally, these companies are not responsible for maintaining and operating the 403(b) plan.  403(b) retirement plans differ significantly from the better-known 401(k) retirement plans in many aspects.

Legal Requirements for Each Retirement Plan

401(k) plan managers must follow rigid legal requirements for the maintenance and investment of contribution fund within their plans, as well as monitoring contribution levels. The vast majority of these requirements are directly related to the Employee Retirement Income.   Securities Act (ERISA) of 1974, which was intended to protect the employees' best interests and improve information disclosure.

However, on occasion, a 403(b) plan may not be required to follow ERISA requirements.   When compared to a 401(k), there are two very large differences for a 403(b) plan. First, any employer contributions may be withdrawn early without any tax penalty if, and only if, if it invested in an annuity fund. As the organization is not considered a taxable entity in the first place, the government treats any contribution as the same.

Second, unlike a 401(k), employees may leave their 403(b) account with a former employee, as these retirement plans offer investments through annuities, money market accounts, or mutual funds only. Traditional 401(k) plans offer more investment options, including mutual funds, stocks, and bonds.

Rollover of Assets Between 403(b) vs. 401(k) Plans

So long as an employee may legally receive distributions from the 403(b) plan, and his new 401(k) account may accept rollovers and funds from other retirement accounts, he can easily transfer funds into the new account with no trouble. However, to avoid any potential tax complications, be sure to use a direct rollover. Through this, one may directly take possession of the funds, but federal income tax law dictates that a 20% withholding is applicable. However, the employee receives the remaining 80% of the original funds directly.

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