403(b) Plans: What is the difference between a 403(b) and a 401(k)?

Whether the retirement plan that is offered is a 403(b) or a 401(k) will depend on the type of employer you have. Both plans are similar. They both offer the ability to contribute funds through pre-tax deferrals and allow for tax deferred earnings. The 401(k) and 403(b) plans have a combined annual contribution limit and the assets accumulated in either type of plan can be moved into the other. However there are differences as well.

Non-profit organizations, educational institutions, religious institutions and certain hospitals can offer a 403(b) plan. Government employers cannot offer a 401(k) plan unless they offered a grandfathered plan that was established prior to 1986. They cannot offer both the 401(k) and 403(b) plan at once. Any employer other than a governmental employer can offer a 401(k) plan.

The type of investment allowed in a 403(b) plan is limited to annuities and mutual funds. The type of investment in a 401(k) plan is not limited to annuities and mutual funds but can also be invested in banks, savings and loans, US Treasury notes, municipal bonds, employer securities, stocks, bonds, guaranteed investment contracts, real estate and rare coins.

Employers offering 403(b) plans can offer matching contributions but the matched contributions are usually 100% vested and are much less common than in a 401(k) plan. If matching contributions are made to a 401(k) plan full vesting of the matched contributions are subject to a 3-year cliff vesting schedule or a six year graduated vesting schedule.

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