Retirement Savings: 403(b) vs. 401(k) Explained
Planning for retirement is crucial, and many employees are likely to have access to a 403(b) or 401(k). While both employer-sponsored retirement accounts offer tax advantages, fundamental differences exist. This blog post dives into the details of each plan, helping you better understand the type of account available to you.
Similarities:
Tax Benefits: One key benefit of 401 (k) and 403 (b) retirement accounts is their tax advantage. Both types of plans allow for tax-deferred (Traditional) contributions, which means you can reduce your taxable income today and pay taxes on withdrawals in retirement. Additionally, some plans allow for Roth contributions, which are made using 'after-tax' dollars but offer tax-free withdrawals in the future. These tax benefits can significantly impact your retirement savings, making contributions to these accounts a smart financial choice.
Contribution Limits: In 2024, the annual contribution limit for employees is $23,000, with a $7,500 catch-up contribution for those 50 and older. The combined contribution (employee + employer) is capped at $69,000. The total includes contributions that are Roth and/or Traditional.
Differences:
Eligibility: 401(k) plans are offered by for-profit companies, while 403(b) plans are for public schools, colleges, churches, and other non-profits.
Investment Choices: 401(k) plans often offer broader investment options, including ETFs, individual stocks, and bonds, while 403(b) plans typically focus on mutual funds and annuities. The number of investment options in both accounts is generally limited compared to an individual retirement account.
Loan Availability: Borrowing from a 401(k) is more common, while 403(b) loan options are less standardized and available.
Mayo Clinic allows loans and hardship withdrawals from its 403(b) plan not to exceed $50,000.
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Catch-Up Provision: Some 403(b)s offer an additional 15-year catch-up contribution on top of the standard catch-up, potentially allowing higher contributions. More information about the Special 403(b) Catch-Up can be found here: https://www.irs.gov/retirement-plans/403b-plans-catch-up-contributions
Mayo Clinic does not allow the special 15-year catch-up contribution.
Conclusion: Regardless of which account is available to you, the most important thing is getting started. At the very minimum, contribute what your employer is willing to match and then strike a balance between living today and saving for tomorrow. A financial plan can help determine if you are on track or if adjustments are in order. Here is a free tool to get you started.
Disclosure:
Fortress Financial Group LLC (“FFG") is a registered investment advisor. Advisory services are only offered to clients or prospective clients where FFG and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at https://fortressfg.net/. For current FFG information, please visit the Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov by searching with FFG’s CRD# 315329.
