Differences between 401(k) and 403(b) plans

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Q. What’s the difference between a 401(k) and a 403(b)?
— Investor

A. A 401(k) and a 403(b) — both employer-sponsored retirement plans — have similarities and differences.

The main difference is the type of employers who can offer them.

“Unlike 401(k), plans which are offered by for-profit companies, 403(b) plans are only available to employees of tax-exempt organizations,” said Alan Meckler, a certified financial planner with Cornerstone Financial Group in Succasunna. “These are usually either schools, hospitals or religious groups.”

The names of the difference plans simply refer to the section of the tax code that outlines these plans, he said.

Meckler said for the most part, the two types of plans work the same way.

“While 403(b) plans historically offered more limited investment choices than corporate plans, they’ve recently begun offering a broader array of investment options,” Meckler said.

And while 401(k)s frequently have vesting schedules spread out over a few years, many 403(b)s vest immediately, or over a shorter period of time than in the plans in the for-profit world, Meckler said.

We hope you’re using whatever plan is available to you to boost your retirement savings in these accounts, which both have significant tax benefits.

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This post was first published in July 2016.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.