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Differences Between 401(k) and 403(b)

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I was recently asked by a friend what the differences are between a 401(k) and a 403(b) to which I answered, very little. Both are offered by your employer, both may or may not feature employer matching contributions, both take contributions pre-tax up to a specified yearly limit, both are called “defined contribution” plans (versus “defined benefit” like pensions), and both are great ways to save for retirement. The differences between the two types of plans have been greatly minimized with the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001.

Remember, the names of these plans are derived from the section of the United States Internal Revenue Code under which they are defined. The three main ones are the 401(k), the 403(b), the 401(a) and the 457. So, it’s not necessarily the case that the plans are different, they’re just specified in different sections.

That being the case, the main difference is that the 401(k) is offered by for-profit businesses whereas the 403(b) is offered by not-for-profit businesses. [The 401(a) and the 457 cover employees of state and local governments and some other tax-exempt organizations.] For all intents and purposes to the employee, there are very few other differences (you can get your money out earlier than 59.5 under certain circumstances) but there is proposed legislation to bring the two plans even closer together.

If you’re deciding between two jobs (even if it’s your current job versus your potential new job), one that offers a 401(k) and another that offers a 403(b), rest assured that they’re basically the same so it should not affect your decision.

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16 Responses to “Differences Between 401(k) and 403(b)”

  1. claire says:

    I have often wondered if it’s easier to roll a 401k than a 403b. I know that’s not a legislative matter, but out of the 4 employers, past and current, where I’ve had 403b accounts, only 2 would allow me to roll my 403b money over into an IRA when I left. Of the 2 that wouldn’t allow it, 1 would allow me to roll my money into another workplace’s 403b or 401k plan. And one past employer plans to keep my money for the next 30 years, until I turn 59.5. I wonder if for-profit companies would be more eager to get rid of old employees and their money.

    Would love to see stats on employers’ plan rules.

  2. Dus10 says:

    Claire,

    I am not sure if the past-employer can legally limit your ability to roll over your funds. I think that there power is only whether or not they will allow you to keep your funds in their plan after you leave. For instance, they can force you to do something with the money, at your discretion (rollover into another defined contributions plan, an IRA, or take distribution). You may want to check into that… but I think their hands are pretty much tied on that.

  3. sean says:

    I am sure – your past employer cannot legally limit your ability to rollover a 403(b) plan. While actively employed with them, sure, they can limit your ability to move those funds around, but once you’re an ex-employee, you can do whatever you want with it. They sure as hell have no legal right to hold those monies for 30 years, and if they continue to claim so, I’d probably be seeking legal counsel.

  4. claire says:

    Jeez, are you sure they can’t prevent it? They claimed they could, and the 403b plan administrator (TIAA-CREF) agreed with them. I wrangled with them for months and finally gave up.

    I am so tired of dealing with it (and with sitting on hold at TIAA-CREF to talk to nice but inept people) that I’m ready to just say forget it. I’ll be in touch in 30 years. I don’t have the time or $$ to hire a lawyer to go chasing after $10K.

    But thanks for making me feel like my anger is justified. It’s my bleeping money. I should be able to roll it to another plan if I want to.

  5. Rich Slick says:

    I had a relative who had a TIAA-CREF and was able to roll over money with no problem. Send them a written certified letter saying you want your money rolled over. They are legally required to respond. Depending on what response you get will determine what legal action to take.

    If you end up using a lawyer to get your money back, TIAA will have to pay the legal bills so it won’t cost you anything except time.

    Make sure it’s a certified letter.

  6. mapgirl says:

    I think it depends on how Claire’s plan is defined. Every plan is different and her plan may stipulate this limit. I was in a 403(b) with a 7% Safe Harbor which was separate. I was able to roll into a private IRA when I left, but since my next employer was a 2-man operation, I had no place to roll the money but the private IRA anyway.

    Educational institutions, which mine was, tend to be VERY conservative and I have never EVER worked at another place which forced me to save 7% of my income. At the time, I was fresh out of college with lots of student loans and it was NOT in my best interest to contribute to a safe harbor program. I was MUCH BETTER off taking the money and not racking up more credit card debt living in the Bay Area or using it to pay down the student loans.

    OMG. I think my bitterness to this day is seeping out between the lines. oops. Sorry!

  7. AmDollar says:

    I believe that it depends on the previous employer’s plan whether or not there is a limit. I’ve seem some crazy plans from organizations whether profit or not for profit that have stipulations on when you leave the company. Since I’m only familiar with 401k roll overs, mine was fine and took about a week to complete.

  8. claire says:

    Mapgirl: “OMG. I think my bitterness to this day is seeping out between the lines. oops. Sorry!”

    Yeah, you can hear that I’m a little bitter too. Oh well. TIAA-CREF just started offering a much better range of funds. My former employer, the ones who are hanging onto my money, don’t allow participants to invest in those funds, but I think they are going to start offering them soon. So that will help.

  9. Actually, there’s A LOT of difference between 401(k)s an 403(b)s. A 403(b) is typically done on a one-on-one basis between the account holder and an insurance or mutual fund company.

    School districts typically do not decide on ONE provider like a company does with a 401(k), so teachers are left to fend for themselves. The problem with this is that the 403(b) plans offered to teachers are often fee-ridden crap, pushed by salesmen!

    The low-cost 403(b) plans from companies like Vanguard are not “sold” because they don’t pay commissions. Therefore, most teachers and school districts don’t even realize that lower-fee options exist.

    If you work for a nonprofit that offers 403(b) plans, you owe it to yourself to look for the lowest cost option available. If you look through your choices and don’t see something from Vanguard or even TIAA-CREF, you need to ASK them why they aren’t offered.

    • Karen Tompkins says:

      This is exactly the data I’m seeking! My school system offered AIG-Valic and I bit immediately, unaware of any other options. I also have a little from another state I need to rollover. I could open an IRA from TIAA-CREF. Do you think I should get out of AIG? How can I find out if their fees are exhorbitant?

  10. al frizz says:

    I am currently employed by a local school system and enrolled in their 403b plan and investing in mutual funds(no annuity). My plan is to roll a large portion of those funds in to a Treasury Direct account which I will establish. I want to continue payroll contributions in to the 403b and periodically transfer to the T-dir account in the future. So far, I have hit a ‘brick wall’ with the investment company. Where do I stand?

    Thank you

  11. JC says:

    Exellent answer. It is a brief and clear answer! Good job!

  12. Janet says:

    I have a 401(k) plan with my full-time employer; I also teach part-time, one course, at a local university that has a 403B plan. I am 61 and entitled to the 401(k) catch-up, so I can contribute up to $22,00O to my company’s 401(k plan). But my question is, can I contribute up to the $22,000 between the two plans, contribute some money to one and some money to the other as long as I don’t go over the $22,000 maximum?

  13. Jackie says:

    I am just beginning my career as a teacher and a 403b is very new to me. Do you have any recommendations on where to begin? There is a company available for financial advise and guidance in this process, however, they then receive a certain percentage of our money. I do not want to take that route.

  14. Ex-Teacher says:

    I am no longer teaching and was wondering if it is possible and if it is smart to roll my 403b to my new employer 401k? Or is it better to keep them separate even though I can’t contribute to my 403b anymore?
    Thanks in advance.

  15. harriet kalinsky says:

    i have a 403b and an IRA. I take distributions from ONLY the IRA.. will I be peanalized for not taking contributions from my 403b… since I DO TAKE THEM FROM MY IRA??????


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