What Are the Differences Between 401(k) and 403(b) Accounts?


Quick Answer

The main differences between 401(k) and 403(b) accounts are that 403(b) accounts offer no profit sharing, usually feature lower employer contributions, and often have more restricted investment options, Investopedia explains. This is due to the fact that for-profit entities sponsor 401(k) accounts, while nonprofit and government entities sponsor 403(b) accounts.

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Full Answer

Although 401(k) and 403(b) accounts are very similar, some key legal differences distinguish them. Investopedia notes that 401(k) accounts typically offer a higher rate of employer contributions because parts of the Employee Retirement Income Security Act (ERISA) that impose additional guidelines and require additional reporting do not apply to 403(b) accounts if the sponsoring organization does not make contributions, so many don't to avoid these regulations. In addition, special registration requirements apply to investment funds that wish to be included as part of a 403(b) plan.

Overall, 401(k) and 403(b) programs share many similarities, and their main features are the same, explains Investopedia. Both are retirement plans offered by an employer (as opposed to individual retirement accounts, or IRAs), the same contribution limits apply to both, and the same limitations apply to individuals withdrawing money before reaching age 59 1/2. Like IRAs, both types of programs are also available as Roth plans.

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