Here Are The Differences Between A 401k And A 403b Retirement Plan

If you’re looking into retirement funds, this is good news for your finances. It means you want to move away from paycheck-to-paycheck mode and start planning for your future. Some people start this process when they’re still in their early 20s. Others don’t get to it until their 30s or later. No matter your age, the best time to start building your nest egg is right now.

The earlier you start, the better. You’ll get the benefit of compounding interest over time. Saving is not easy, but it becomes second nature once you’ve been doing it for a while. If you can get into the habit of saving, planning for retirement will be much less worrisome.

The easiest way to save for retirement is through an employer. They will most likely offer you one of two tax-advantaged investment plans: a 401(k) or a 403(b). The plans have many similarities, but they are still different. Here are the key things that make each plan unique…

Know Your Company, Know Your Plan

The 401(k) plan is, by far, the most well-known retirement plan. Most companies offer this plan over the 403(b), especially if they are for-profit companies.

Nonprofits, like schools, charities, and religiously affiliated organizations, typically offer 403(b) plans. These companies are exempt from some of the administrative processes and costs because of their nonprofit status. Avoiding these fees allows nonprofits to offer their employees many of the same benefits that for-profit companies offer.

The Resemblance Is Uncanny

Employees are eligible to make very similar contributions, no matter which plan they are on, and all contributions are pre-tax. This means, when it comes time to taking money out of your retirement fund, you’ll need to pay the taxes on it.

Another similarity is that employees have the option to increase their contributions once they reach a certain age – though the 403(b) may have more restrictions than the 401(k). Also, on both plans, there are restrictions on the age you must reach before you can withdraw money from your funds.

One great parallel between the two plans is that your contributions can be matched by your employer. Some employers even contribute regardless of whether you are putting any money in at all. Others might require you to commit to small contributions before they will put any money in.

All employer matches have a maximum, an amount at which the company will stop contributing for that year. The same is true for yearly employee contributions. There is a limit to how much you can put into your retirement fund in one year. This is a hard limit set by the government. But that shouldn’t stop you from investing your money in other ways.

The Spectrum Of Investment Options

Each plan is managed in a different way, so the options for investing really vary. The caliber and diversity of the options depends on which brokerage house your employer chooses.

Nonprofits typically select brokers with the cheapest plans that include the fewest fees. They might go so far as to limit the types of investments available to employees, which helps both the organization and its employees. On the other hand, for-profit companies tend to be more flexible, offering many more investment options to their employees than nonprofits. The downside to this is that there are often fees involved.

Online calculators can be beneficial tools to help you understand the costs and fees of each plan. Every plan is different, so weigh up the options before choosing one.

Nonprofit Vs. For-Profit

There are some significant differences between 401(k) and 403(b) plans. One of them makes total sense: For-profit companies offer plans that contain profit-sharing options. Nonprofits don’t offer the same plans because they aren’t designed to make profits. They are structured differently, and profit-sharing wouldn’t make sense for that structure.

Another distinction between the two plans is that companies that offer 403(b) options often discourage employees from participating in the employee-match components of their plans. That’s because these organizations tend to have small budgets and could potentially lose significant tax exemptions.

The Pros Know

Researching retirement plans can be tedious and frustrating. There are so many plans and so many options within each plan. But it is important to know what you’re doing because you work hard for your money and you should know where it’s going.

After weighing up all the options, if you still have questions, you could consider requesting the advice of an investment professional. What’s great about them is that they get it. They know how the funds work, and they can tell you all about the fees involved. They will do the part that makes you want to rip your hair out, and they’ll leave you with the confidence that you’ve chosen the plan that’s best for you. The money you’ll save over the long term will more than cover the cost to hire the professional.

Planning For The “Now”

You can go one step further and hire a financial advisor. This will benefit you in more areas than just retirement funds. Financial advisors will talk to you about your income and what you can do with it. They’ll help you identify your long-term goals and give you the short-term steps required to get you on your way to those goals. Most importantly, they’ll teach you how to make a budget and stick with it.

Financial advisors can find holes in your existing plans, too. If you’re not putting enough into your retirement fund to meet your long-term retirement goals, they can get you on the right track. But they can also help you with things that are happening right now, like wanting to buy a house, paying off student loans, putting money away for your children, managing an additional piece of real estate, or making a plan to bring you closer to the luxuries or hobbies you want in your life.

They might also help you find a balance or a connection between your and your partner’s finances. Financial advisors aren’t marriage counselors, but they can help you to get on the same page, money-wise.

A Long And Happy Financial Life

As important as it is to pay your bills and put food on the table, what is your plan for what you’ll do when you aren’t working anymore? Will you still be able to pay those bills and put that tasty food on the table? Take the time to understand how to get on track to a safe and happy retirement.

Living for just the “now” can be fun…for right now. Planning for the future gives you the stability and peace of mind to truly enjoy today.