Which is better for your retirement, 401(k) or 403(b); can I have both?

If you are in a situation where you just received a new job (Congrats!) and are in a rare situation where your employer provides both a 401(k) and 403(b), you are probably wondering what the difference is and which one is better for your retirement. Don’t fret, we will explain the crucial details below.

It’s your first day on the job and HR bombards you with stacks of paperwork with information related to employer provided benefits and the company’s retirement plan. You are likely confused by the actuarial predictions and legal jargon, but it is important that you understand what is provided. Don’t worry, we are all confused by this. So, which one exactly is right for you, and can you have both?

While both 403(b) and 401(k) plans provide an employee with the opportunity to make pre-tax contributions towards a tax-deferral account, a 403(b) is provided to employees in the private sector, while 401(k) serves employees in the public sector. When an employee opens a 401(k) or 403(b), any amount they decide to contribute is first deducted from payroll and added to their retirement account prior to taxes getting deducted. Additionally, the money in these accounts grows tax free until the time you withdraw it. This is a big advantage compared to other investment accounts. The government wants to incentivize people to save for retirement, so this is one way they do so.

Now That You Know the Difference Between A 401(K) And 403(B), You Might Be Asking Yourself: Can I Have Both?

In the rare case that your employer provides both a 403(b) and a 401(k), the taxation rules allow an individual to contribute to both plans in order to maximize their retirement savings. However, contributions are not without limits. The limits apply both to the combined limits that you and your employer contribute. 

What are the contribution limits? In 2020, for workers under the age of 50, the limit an employee can contribute is $19,500/year. For workers over the age of 50, the contribution limit is $26,000/year (including a $6,500 catch-up contribution). However, if an employer contributes for an employee, the limits allowed varies by the age of the employee.

SO, there you have it. You are allowed to contribute to more than one retirement account, but there are limits that are placed on tax-deferred contributions to either plan individually.

Which Type of Retirement Account Has More Fees?

            As you just learned that investing in a 401(k) and/or 403(b) is similar, one key aspect to focus on is what type of fees each type of investment incurr within each retirement vehicle. Additionally, it is common that 403(b) account funds vest over a shorter period of time, in comparison to 401(k)s.

Another benefit of a 403(b) is that if an employee has 15 more years of service working for a specific institution in the public sector, then they may be eligible to make additional catch-up contributions to a 403(b) plan that would not be allowed under a 401(k) plan.

What to Consider When Deciding Which is Best for You

            As 401(k) and 403(b) are similar retirement vehicles, you want to look to what type of funds each invest in. You want to look for index funds among the investment options because index funds usually have lower expense ratios compared to competitors that are actively managed.

            If you are just getting started in your career and are in your early 20s, it is wise to invest 80% of the retirement contributions in stock and 20% in bonds. This is known as asset allocation. As you start to get older, and your preference for risk taking goes down, you want to shift towards investing more towards bonds (the safer vehicle) and less toward stocks (the risker vehicle).

If you have any questions related to planning for your retirement, please do not hesitate to reach out to one of our team members—we would love to help you!

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