403B vs. 401K: How Are They Different?

You've just taken a job as an administrator at a nonprofit hospital. Or maybe you've found a solid job at a tax-exempt religious organization. Now you're ready to start saving a portion of every paycheck for your retirement.

There's a wrinkle here, though: You won't be able to save in a 401K like employees of for-profit corporations can. Nonprofit, tax-exempt institutions don't offer 401K plans to their workers. Instead, they offer what are known as 403B plans.

The good news? These plans work much like 401K plans. And if you do set aside a portion of each of your paychecks for your 403B plan, you'll dramatically increase the odds of a financially stable retirement.

The Big Difference

The main difference between a 401K plan and a 403B plan is who offers them. Traditional for-profit corporations offer 401K plans. These are the retirement savings vehicles with which most U.S. workers are familiar: You set aside a percentage of each paycheck, and that money is deposited in your retirement account.

The money in that account can be invested in mutual funds or other investment vehicles. The money grows — hopefully — tax-free until employees withdraw their funds. Only then do they pay income taxes on it.

A 403B plan works the same way — only for-profit corporations don't offer them. Instead, these savings vehicles are only offered by institutions that are nonprofit and enjoy tax-exempt status. This usually means hospitals, public education providers, charities, and religious institutions.

Other Differences

There are some smaller differences between the two savings vehicles, too. Usually the biggest, and the most important to employees is that employers offering 401K plans often offer matching incentives.

An employer, for instance, might decide to match 50% of the first 6% of the salaries that employees contribute to their 401K plans each year. Say a typical worker with such an employer makes $50,000 a year and that worker has decided to contribute 6% of his or her annual salary to a 401K plan. The employer will match 50% of this worker's contributions, but only up to 3% of the employee's annual salary.

So each year, this worker would invest $3,000 to the 401K plan, 6% of this worker's $50,000 salary. The company would invest an additional $1,500 to the 401K plan as a match.

Company matches are a good way to boost retirement savings. But companies that offer 403B programs, though not prohibited from doing so, rarely offer matching benefits.

Corporations can also offer profit-sharing as part of their 401K programs. Under a profit-sharing arrangement, employers once a year can make a voluntary bonus contribution to their employees' 401K plans. This contribution can vary each year, often going up or down depending on how successful the company was.

Institutions offering 403B plans, though, can't offer a profit-sharing bonus. That's because the organizations offering these plans don't generate a profit.

Both Are Worthwhile

There is another big similarity between 401K and 403B programs: For both 401K and 403B plans in 2016, you can contribute a maximum of $18,000 if you have not yet hit your 50th birthday. If you are 50 or older, federal law allows you to contribute even more to these retirement accounts. You can make a yearly catch-up contribution of up to $6,000, meaning that if you are at least 50, you can contribute a total of $24,000 to your 403B or 401K plan.

Are you invested in a 401K or a 403b?

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Guest's picture

I have a 403(b) through my employer and they offer matching that is far better than any of my friends with a 401(k). They match 100% up to 8% of salary and after you are vested (3 years) they match 150% up to 8%. So, since I am vested, I contribute 8% and my employer contributes 12% for an astounding 20% of income invested for retirement.