Planning for retirement can be as complex and critical as any investment decision. While most of us are generally aware of the benefits of retirement plans, the specifics can be daunting. If you're an employee of a non-profit organization, a school, or a religious group, your plan might be a 403(b). Otherwise, you're probably enrolled in a 401(k) plan. The tricky part is understanding the similarities, differences, and potential of having both. Sailing through the abundance of retirement saving options requires a map, and that's what this post endeavors to be – your roadmap to master the realm of long-term savings.
Retirement plans like the 401(k) and the 403(b) are designed to offer employees a way to save for retirement on a tax-advantaged basis. These plans allow you to defer a portion of your income to a retirement account, reducing your tax liability now and growing your retirement savings for the future. 401(k) plans are typically offered by for-profit companies, whereas 403(b) plans are generally available to employees of public educational institutions, non-profits, and certain ministers.
The gist of these plans is simple – you contribute a portion of your income to your 401(k) or 403(b) account, and often your employer matches a percentage of your contributions. The funds in these accounts are then invested in a diversified set of options, typically including stocks, bonds, and mutual funds, which grow tax-deferred until you retire or make withdrawals. Sounds easy, right?
The structure and eligibility of 401(k) and 403(b) plans can be quite similar, but there are notable distinctions:
401(k) plans are available to any employee of a for-profit company, regardless of their salary. In contrast, 403(b) plans are designed exclusively for staff of specific types of non-profit organizations, like schools, hospitals, and religious organizations.
The contribution limits for 401(k) and 403(b) plans are identical, including catch-up contributions for those over 50. However, employees with at least 15 years of service may be eligible for additional catch-up contributions in a 403(b) plan, which can result in larger retirement savings over time.
401(k) and 403(b) plans offer different investment choices. Normally, 401(k) plans provide a broader range of options, including brokerage windows or self-directed brokerage accounts, allowing for a more varied investment strategy. In contrast, 403(b) plans may be more limited, often restricting employees to annuities or mutual funds, which could affect the diversity and potential risk of your investment portfolio.
While the match structure can vary by employer, the company contribution to your 401(k) can have a different vesting schedule compared to a 403(b). In some instances, the 401(k) match may vest immediately or over a shorter period, whereas the 403(b) match might have a more extended schedule, meaning you may not keep the employer’s match unless you stay employed for a minimum period.
Can You 'Two-Time' the Retirement Plan Scene?
Yes, you can have both a 401(k) and a 403(b) account! But, just because you can doesn't mean you should. For many, having both plans is an advantage as it doubles your tax-deferred opportunity for retirement savings. However, there are a few caveats. The key lies in understanding your financial situation and investment strategy, as well as your employer's plan, to make an informed decision on how to leverage these plans effectively.
By having both a 401(k) and 403(b), you can potentially save more for retirement. If you're under the age of 50, the combined contribution limit for both plans in 2021 is $38,500. This increases to $64,500 if you are over 50 and can make catch-up contributions. Each additional dollar contributed to a retirement account is a dollar that grows tax-deferred, bringing you one step closer to your retirement goals.
While 401(k) and 403(b) plans have their own investment options, having both can offer a more diverse portfolio. Diversification reduces risk and increases the likelihood of having a well-performing account over time.
If you're lucky enough to have an employer who offers to match contributions, having both plans means you might benefit from the match on both sets of contributions, effectively doubling your employer's contribution.a
Understanding the nuances of 401(k) and 403(b) plans is no small feat. With the complexity of financial planning, consulting with a professional can be an invaluable step. Simplify Retirement offers personalized retirement planning and wealth management designed for your peace of mind. Our seasoned advisors can help you make the most of your retirement benefits by crafting a tailor-made strategy that encompasses all your financial options.
Get in touch with us at Simplify Retirement to learn more about your retirement options.
