403B Vs 401K: What’s the Difference in These Plans?

When it comes to planning for retirement, there are so many things that have to be considered. It’s not at all uncommon for a person to feel completely overwhelmed by the very thought of saving for retirement, much less actually taking the steps necessary to do it. When you’re talking about planning for retirement and having your job kick in a portion of it as well, such as in the case of a 401k, a lot of people don’t really know what to expect. Things get even more confusing when you start talking about the differences between a 401k and a 403b.

In reality, these are two very different things that allow you as an employee to accomplish the same thing, and that is to save money for your retirement. In all likelihood, you won’t really have a choice about which program you will participate in because most organizations either participate in one or the other. When it really comes right down to it, your choice is whether to participate in the program or not. Unfortunately, a lot of people have the tendency to make the mistake of failing to participate in either program when it’s offered to them. In order to adequately plan for your retirement, it’s important to consider the levity of taking part in such a program, especially when you understand that your employer will also be putting a certain amount of money toward your 401k or 403b. It’s equally important that you understand that in either case, that money is tax-free so you could be saving yourself some money now as well as in the future. With that being said, it’s imperative that you understand the differences between these two programs so you know exactly what you’re being asked to participate in to begin with.

The thing is, you’re not really likely to notice the difference between a 401k and a 403b as an employee. They both accomplish the same thing and they both require you to put up so much money each month for your retirement, which is usually matched, to a degree, by your employer. The difference between the two involves what type of job you have. If you’re working for a private corporation that’s in business for a profit, you’re going to be dealing with a 401k. On the other hand, if you work for a church, school, government agency, a nonprofit agency, or certain healthcare agencies that are not for profit, you’re dealing with the 403b. All it really amounts to is a different classification that allows the employer to save money.

Agencies that operate on a not-for-profit basis are usually doing well to get their basic costs covered from one month to the next. As a direct result, they’re always searching for a way to keep costs down as low as possible so they can continue to do what they’re doing without either cutting staff or charging more for their services. When they have a retirement program that is in a 403b, they get certain breaks from the government when it comes to administrative costs. To put it simply, that can allow them to offer a retirement program without spending as much money in order to do it. This is imperative because if it weren’t for the existence of the 403b, it’s entirely possible that they wouldn’t have a retirement program at all. Most agencies that operate as nonprofit entities simply couldn’t afford to offer a program under the 401K guidelines.

If you’re wondering how all of this is likely to affect you, you should be happy to know that you don’t usually need to worry about it. More often than not, your employer still puts a certain percentage forward to match whatever you’re putting into your 403b every month, giving you the opportunity to potentially double that amount each month. Of course, it’s always a good idea to find out if there is a minimum amount of money they require you to put into your 403b account each month and if so, how much of that they’re willing to match. You would be asking the same questions if you were opening a retirement account that operated under 401k guidelines.

If you feel completely lost about the entire subject or you’re uncomfortable with it, it’s a good idea to contact a financial advisor so that you can present the information to them and let them walk you through it. More often than not, your employer will have someone that specializes in the program come and talk to you so this step isn’t always necessary. The good news is that either way, you have the opportunity to save for retirement and in most cases, the process isn’t nearly as difficult as you might think at first.


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