401K versus 403B

I'm a participant in a 403(b). It acts almost exactly like a

401(k) for employees of nonprofits, educational institutions, and (I believe) some ministers. The employer sponsors the plan. Contributions are made by payroll deduction with pre-tax dollars. Tax on gains is deferred until withdrawal. My nonprofit employer does not match contributions, but it's because the employer fully funds a traditional defined-benefit pension plan. I thought employers offered either one or the other, based on their profit/nonprofit status. Is there an employer out there sponsoring both a 401(k) and a 403(b) and letting employees choose? Cynthia in Chicago

The numbers refer to the section of the IRC that permits the plan.

403B plans are offered by tax-exempt employers while 401K plans are offered by employers subject to federal income tax. Otherwise, they're basically the same. Many non-profit organizations have their 403B plans administered by TIAA-CREF, especially educational institutions, and that plan adminstrator seems to have an old-fashioned leaning towards offering participants annuities. However, as long as the employer participates in a range of options for their employees, you usually have the choice of mutual funds or income funds or growth funds just as you would in a 401K. Of course, your 403B plan will NEVER have the option of buying your own employer's stock, since no one with publicly traded stock would be offering a 403B.

-Crystal

For an 18 year old just starting out, I would recommend she go with private enterprise (all other things being equal), for a 401k plan will offer more investment choices than a

403b plan in the public sector. Many, well, most, of them allow the participant to allocate investments into high/medium/low risk sectors. ChEAr$$$$, Harlan Lunsford, EA n LA

Moderator: If you ask my sons "How old is your mother?", they were taught to answer "I don't know, but she looks 23."

(snipped....)

(grin!) I knew about that, Dick! But if she were reading over your shoulder, I hope I made her day. C$$$$, HL

The CCH Master Tax Guide (2007) has information about both. It talks about 401k's in ¶2111 and 403b's in ¶2167.

Stu

I agree that this really isn't a tax matter but I think I must be missing something very basic here.

I didn't think that you got to pick and choose between a

401K or a 403B plan. I thought the difference was that only non-profits could even offer a 403B. My daughter, who works for a hospital, can only have a 403B.

Are there circumstances where one can choose or did I not understand the question?

It turns out that for the first year she is the 403 B unless she opts out. At the beginning of the second year, she can open a 401 K, but it appears that this option is only for those who opt ou of the 403 B.

Dick

No, I think you understand. You don't get to choose. If you're employed by a non-profit, they will only offer a 403b and not a 401k. Working for a for-profit company? Vice versa.

It depends. Our State offers 401k and a public 457 to all State employees. The State also makes its benefit plans available to all public school teachers and public universities. Those teachers and university people are also eligible for 403b. So throughout our State we have folks who are choosing between the three plans. Many use two of the plans and save the max in each (one has to be the 457 for that to happen.) The main difference, as I said before, lies in expenses and funds offered. Of course, if there is an insurance company in the mix there may be surrender charges and liquidity issues. And the qualified plans (401k and 457) have slightly different distribution rules (age 55 versus no age restrictions for 457).

-HW "Skip" Weldon Columbia, SC

Are you sure? I know several people who work for MIT and they swear up and down to me that they have a choice between a 401(k) and a 403(b).

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Apologies all around. My proof reader obviously needs to lay off the bourbon and branch water. The above sentence should be... "And the qualified plans (401k and 403b) have slightly different distribution rules..."

-HW "Skip" Weldon Columbia, SC