The schemes 401 (k) and 403 (b) mentioned in sections 401 (k) and 403 (b) of the Tax Act are tax-free Retirement plans offered by employers. The primary difference between the two is the type of employer sponsoring the plans – 401 (k) plans are provided by private for-profit companies, while 403 (b) plans are only available to non-profit organizations and government employers.
Another key difference between the 403 (b) and 401 (k) plans is the investment options offered by both, although this difference decreases over time.
When the 403 (b) plan was also known as a tax-protected annuity, it was limited to the annuity form. This restriction was lifted in 1974.
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A Collection Of Keys
- 401 (k) and 403 (b) retirement benefit plans are qualifying retirement benefit plans provided by employers to their employees.
- For-profit companies offer 401 (k) plans to eligible employees who pay cash before taxes or after taxes with a payroll deduction.
- 403 (b) plans are offered to employees of nonprofits and government.
- 403 (b) plans are exempt from nondiscrimination testing, while 401 (k) plans are not.
401(k) Retirement plans
A 401 (k) plan is a qualifying employer-sponsored retirement benefit plan to which employees are entitled to make deferred post-tax and/or pre-tax payments. Employers who offer a 401 (k) plan may make similar or non-selective payments on behalf of employees eligible for the plan and may also add a profit-sharing feature to the plan. 401 (k) Retirement plans revenue accrues on the basis of a tax credit. The 401 (k) Retirement plan is offered through private employers.
When you withdraw funds from 401 (k) – or “take distributions,” as the proverb says – you begin to both enjoy your retirement income and face its tax consequences. Most people and most of their 401 (k) s dividends are taxed on ordinary income, just like pay. However, your tax burden will vary depending on the type of 401 (k) and how and when you withdraw funds from it.
It is rare, but possible, for an employer to offer both 401 (k) and 403 (b). In these cases, employees can participate in both accounts.
403(b) Retirement plans
403 (b) a plan is a retirement plan for certain employees of public schools, tax-exempt organizations, and certain ministers. These plans can invest in either annuities or mutual funds. The 403 (b) Retirement plan is also another name for the tax-protected annuity plan, and the features of the 403 (b) plan are comparable to those of the 401 (k) plan.
Employees of tax-exempt organizations can participate in the scheme. Participants include teachers, school administrators, professors, government employees, nurses, physicians, and librarians. Many plans receive funds for a shorter period of time than 401 (k) plans or may allow for immediate receipt of funds.
Legal Differences Between 401(k) and 403(b) Retirement plans
In particular, 403 (b) plans are not required to comply with many provisions of the Employee Retirement Income Security Act (ERISA) for approved taxable retirement investments, including 401 (k) and 403 (b). For example, 403 (b) s are exempt from nondiscrimination testing. The purpose of this annual testing is to prevent older or “highly paid” employees from disproportionately benefiting from a particular arrangement.
The reason for this and other exceptions is a long-standing order from the Department of Labor that 403 (b) plans are not technically marked as employer-funded as long as the employer does not fund the contributions. However, if an employer makes payments to employees’ 403 (b) accounts, they are subject to the same ERISA guidelines and reporting requirements as 401 (k) plan providers.
In addition, mutual funds must comply with registered investment companies under the Securities and Exchange Act of 1940 in order to be included in plan 403 (b). This does not apply to 401 (k) investment options.
Practical Differences Between 401(k) and 403(b) Retirement plans
| 401(k) | 403(b) | |
|---|---|---|
| Employer Type | Usually offered by public companies | Usually offered by non-profits |
| Investment Choices | Stocks, bonds, mutual funds, variable annuities, index funds, or ETFs | Limited to mutual funds and annuities |
| Single Employee | Solo 401(k) for one-person businesses | No solo version |
| Plan Limits | No extra contributions | Qualified organization employees with 15 years can contribute more |
The SECURE Act and Annuities in 401(k) Retirement plans
However, the Setting Every Community Up for Retirement Enhancement (SECURE) Act allows employees to see more annuity options in their 401 (k) plans. This is because the SECURE Act removes many of the barriers that previously prevented employers from offering annuities as part of their retirement plans.
Under certain guidelines and procedures, ERISA trustees are now immune from liability if an annuity finance company is in financial difficulty that prevents it from meeting its obligations to its 401 (k) participants.
In addition, under section 109 of the SECURE Act, annuity arrangements under section 401 (k) are now transferable. This means that if an annuity plan is terminated as an investment option, participants can transfer their annuity to another employer-sponsored retirement plan or IRA, eliminating the need to liquidate the annuity and pay redemption fees and commissions.
The Bottom Line
Nevertheless, the 401 (k) plan and the 403 (b) Retirement plans are very similar for retirement vehicles. Both have the same basic payment limits, both offer Roth options, and both require participants to reach 59.5 years of age before splitting.
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