If you're looking to stash away more cash each year than you're allowed in an individual retirement account because of the lower contribution limits, a 401(k) plan or 403(b) plan could be just the ticket. Both plans offer tax-sheltered growth and can offer after-tax contributions as well as pretax contributions. However, there's also a number of important differences between the two.
To start with, 401(k) plans and 403(b) plans serve different sectors of the workforce. If you're slaving away in a for-profit company, your employer can offer you the chance to contribute to a 401(k) plan but not a 403(b) plan. On the flip side, if you're working for a non-profit, such as a public school or hospital, your employer can offer you a 403(b) plan but not a 401(k) plan.
When your employer offers a 401(k) plan, the company is responsible for running it. With a 403(b), the company doesn't have to take responsibility for the plan. Instead, outside financial institutions can offer the ability to contribute to employees. In addition, according to Morningstar, employers offering 401(k) plans are more likely to make matching contributions on behalf of their employees; 403(b) plans rarely include matching contributions.
With a 401(k) plan, you generally have a wider range of investment options than with a 403(b) plan. According to the Financial Industry Regulatory Authority, 401(k)s must offer at least three investment options, and most offer between eight and 12. A 401(k) plan can also offer to set up a brokerage account, which allows you to pick your individual stocks you invest in. On the other hand, according to TIAA-CREF, you're usually limited to mutual funds and annuity contracts in a 403(b) plan.
For the most part, 401(k) and 403(b) plans have the same contribution limits. In fact, contributions to your 401(k) plan reduce the amount you can contribute to a 403(b) plan and vice versa. However, 403(b) plans do have extra contribution advantages. First, if you've logged at least 15 years in your job, you can potentially contribute an extra $3,000 each year. But you can only contribute an extra $15,000 over your lifetime with this bonus contribution. Second, 403(b) plans allow your employer to contribute to your account for up to five years after you've left employment, but employers rarely do so.
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."