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How is a 403b different from a 401k?

Trying to decide between investment plans can be a real nightmare. There are so many, it can be confusing on which one to choose. Here are straightforward tips in the main differences between a 401k and 403b investment plans. Both are tax-advantaged retirement saving plans made available through employers, but the main difference lies in the type of employer or organization for whom you work.

403b Retirement Savings Plan

A 403b investment plan is a tax deferred retirement plan for people who work in public and non-profit organizations, such as schools, colleges, universities, some hospitals, and religious organizations. Employee salary contributions are invested into a 403b plan before the employee pays income tax on the contribution amount. This allows the invested money to grow without paying tax on it, until the money is withdrawn. The employer contributes to the investment fund as well, it may be a pre-set amount for everyone, or a percentage dependent upon how much the employee contributes. If the 503b is funded with tax-sheltered annuities, the employee may withdraw employer money, not tax-deferred employee income, before the standard age of 591/2 years. This money may also be rolled over into a Roth IRA, but must be in the Roth for at least five years.


401k Retirement Savings Plan

A 401k investment plan is a private employer sponsored retirement plan. The employee chooses a certain amount of his or her income to put directly into the plan before paying taxes on it and the employee matches all or part of the employee’s contribution. The difference between the 401k and the 403b is that unlike the 403b plan which is made up of annuities, the 401k plan is participant directed. This means the employee selects from an assortment of mutual funds that are made up of stocks, bonds, and moneymarket investments.



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