Comparison Between 401(k) and 403(b) Plans

 

Life is unpredictable. Nobody knows what’s going to happen at the next second. So, it is important to make a wise retirement plan and ensure a steady flow of money even when you are unable to work. To satiate any type of financial objectives the best method is to invest in fixed annuity. This mode of saving is secured and generates a large figure in the future. When choosing the type of fixed annuities some people opt for 401(k) while some for 403(b). In order to make the best investment, you need to study a comparison between 401(k) and 403(b) and understand the detailed features of each.

Fixed Annuity – What it is

With continuous inflation and poor economic scenario, only putting aside some emergency cash is not enough. With escalating expenses an idle saving is of very little use. Fixed annuities are a type of ‘idle’ option that swells up your money with time. Generally, annuities mean a long term investment and the entire period of savings is further divided into a number of parts. In each part you need to pay a pre-set amount to your insurance company. After the completion of the entire period you get a lump sum figure, calculating the principal plus interest. As the interest rate is predetermined in case of fixed annuities, even during a deplorable market condition, it won’t impose any detrimental effect on your fund.

Types of Fixed Annuity

Fixed annuities are of different types, namely, pension, IRA, 401(k), rollover, 403(b), and so on. All the categories ensure qualified and non-qualified products. The basic difference between a qualified and a non-qualified is recognition of the Federal government and benefit of tax exemption. Again, fixed annuities can be further subdivided into two categories- immediate and deferred.

In the case of immediate annuity, you can determine when the income payment from the insurance company will commence. However, for a deferred annuity you can reset the date from which disbursement of the income will start. In the latter type you will also enjoy some facilities of tax sheltering. As long as the annuity is accumulating you will not have to pay any taxes. However, at the time of withdrawal you need to pay taxes on the total fund amount. The annuity payment will get directly deposited to your bank accounts.

401k and 403b plans are both nearly same retirement plans sponsored by the employer. Both the plans give you special tax benefits and allow you to subtract the amount contributed from taxable income. While the former is offered to employees who work in non-profit public sectors like hospitals, schools, religious organizations, and such others; the latter is offered to people who work in private sectors.

For both 401k and 403b the same stocks and funds are available, depending on who the manager is and which type of fund he (manager) has selected. You can either open your own retirement account (IRA) or contact the HR department to ask the fund manager provide you with a wide range of funds. An IRA also functions in the same way as a 401k retirement or 403 b plans. The only difference is that it is your personal account at any bank or under a financial broker. However, as companies can strike a better deal than individuals, it would better to go through the organization plan. In case of 403b, the amount you will put into the fund will be equally contributed by the company. So, to miss out on the employer’s contribution will really not be a very wise thing to do. Say, if you can afford to fund $100 toward your retirement account, the actual amount added will be $200 (considering another $100 from your company). Is there any point passing up a $100 bill?

Benefits of 403b and 401k

Both these plans are very much beneficial where you get a strong supplement to a pension account. For these plans you will get the benefits mentioned below:

The amount you contribute toward these retirement funds will be deducted from your taxable income each year. With every passing year, the fund amount will grow and you will pay less tax! Normally, for every $100 you contribute towards 403b, the Fed will reduce income taxes by $25 (of course if you are in the 25% tax bracket). So, paying actually $75, you are getting benefit of $100.

Not only your tax savings get multiplied with the increasing funds, all the capital gains, interests, dividends will be accumulated into your 403b account on a tax deferred basis. So, at the time of your retirement, all these earnings will become absolutely tax-free!

401 k rollovers

Nowadays, changing careers at an interval of 5 to 10 years is becoming a trend. So, you may need to roll your k 401 k long before you actually plan to retire. “Rolling” means is to transfer your company-sponsored retirement plan to a personally-managed IRA. This option works the best if you have intention of changing careers/companies frequently. However, you need to keep in mind that if your fund balance is lower than a certain amount, the company will automatically cash out the retirement plan. In such cases, you might be asked to hold back 20% for tax payment. You might also be charged with 10% penalty for withdrawing the fund before 59 ½ years. It would be best to do a trustee-to-trustee exchange, where your former employer will simply have to direct transfer. In direct transfers you will not have to pay toward any penalty or tax ramification.

401k or 403b – Which to Choose

By drawing a comparison between 401(k) and 403(b), it can be said that as 403b is mainly for non-profit organization, these account holders will not be able to accept any dividend or profit sharing from certain brokerage management companies. Also, you will not have full control of the plan. The 403b programs are easily reviewed and certification process is less stringent, as the accounts are exempt from the Employee Retirement Income Security Act. The 403b accounts do not get reviewed periodically and you don’t have to worry over administration costs as well, which is applicable for 401k plans. However, with a 401k plan you will have more choices to invest. Before selecting any plan you should consult your financial planner and make the perfect investing decision.